Regressive VAT burdens the poor and spares the rich
Value-added tax (VAT) is regressive. South Africans knew this in 1991, when the last National Party administration tried to sneak in VAT as a change to the general sales tax (GST) without meaningfully consulting key stakeholders, most notably labour. Multiple mass actions later, the 14% VAT eventually came into effect in 1993.
For some perspective on the history, in 1978 GST (far narrower in scope and coverage) stood at 4%. In the tough economic climate of the late 1980s it shot up to 13%, borne largely by the working poor. There was some zero rating and exemptions. However, these didn’t make it less regressive when viewed alongside other indirect taxes such as the fuel levy and excise duties on alcohol and tobacco (on which poor households spend disproportionately more).
Those who suggest that zero rating mitigates the “regressiveness” of VAT miss two crucial points. First, the spending habits of the poor are not confined to a static list of zero-rated items. Second, the share of the poor in the nation’s total disposable income is far less than the burden they carry in indirect taxation. Surprisingly, we have commentators, policy makers and agitators trying to convince us otherwise.
DA youth leader Makashule Gana suggested on Twitter this week, “... poor people don’t live on brown bread, pap, cooking oil and cabbage alone. There are many items that are essential in the life of a person.”
Gana’s assessment uncovers how our debate on indirect consumption taxes expects frugality from the asset-poor majority and overlooks the decadence of the wealthy. Many “establishment” economists have suggested zero rating would somehow mute the regressive nature of the measures but this overlooks how the poor spend.
Significant amounts are spent on electricity and public transport (neither zero rated). The 2013 National Household Travel Survey found that 68% of travel by public transport was by minibus taxi, which is not subsidised, zero rated nor exempt. Statistics SA data suggest that two-thirds of households in the lowest income quintile spent 20% of their monthly household income on public transport.
Carlos Ray Moreno et al found in Ngqeleni, Libode, that expenditure on connectivity costs borne by the poor was 21.97% of household income in that rural area (with high poverty incidence). To suggest that zero rating is a “sufficient” protection against the regressive nature of increased indirect taxes is to suggest that poor people need only be cushioned from food expenses.
Compared with these meagre incomes the burden of VAT becomes clearer. Wits University’s Gilad Isaacs says the lowest-earning decile (10%) spends 13.8% of its disposable income on indirect taxes like VAT, while the top 10% spend 12.6% — the same top 10% that sits on 55%-60% of the nation’s income and 90-95% of assets.
Some have relied on Ingrid Woolard and her team’s paper for the World Bank on the distributional impacts of fiscal policy, published in 2015, to suggest that VAT would only be “regressive” in the absence of zero rating. In the Woolard paper, the researchers suggest that zero rating of VAT alone may provide a cushion but viewed alongside excise taxes and the fuel levy this cushion leaves little for comfort. The paper suggests that the total share of indirect taxes paid by the bottom 70% of the income distribution outstrips their share of total income. This suggests the poor carry relatively more of indirect taxes than the rich.
If we are concerned about dealing with inequality, it is this low share of income by the poor that we need to address, and redistribute more income to poor households, whose inclination to consume is proportionately higher than those at the top end of the income distribution. With relatively low inflation and low growth, what we need is not just business confidence but consumer confidence — the confidence to spend and thereby stimulate the economy.
The rise in VAT is at odds with such a countercyclical stance and punishes the poor for executive mismanagement and the declining tax morality and avoidance of the wealthy.
ZERO RATING OF VAT ALONE MAY PROVIDE A CUSHION, BUT VIEWED ALONGSIDE EXCISE TAXES AND THE FUEL LEVY THIS CUSHION LEAVES LITTLE FOR COMFORT THE RISE IN VAT … PUNISHES THE POOR FOR EXECUTIVE MISMANAGEMENT AND THE DECLINING TAX MORALITY AND AVOIDANCE OF THE WEALTHY