Increased personal tax ‘a bad idea’
The Treasury’s increasing reliance on personal income tax as a source of revenue was illadvised as it would not contribute to economic growth, PwC tax policy leader Kyle Mandy said in a written submission on the budget.
Parliament’s two finance committees held public hearings on the budget on Wednesday.
Mandy argued that it would be better to increase the VAT rate and fuel levy rather than raising R16,3bn by not adjusting tax brackets and rebates to take account of inflation as the budget proposed.
By increasing personal income taxes through fiscal drag, the Treasury had failed to take note of international studies which showed that high income taxes resulted in lower levels of consumption and savings which in turn made for lower economic growth, he said.
“According to studies conducted by the OECD and others, personal income taxes are after corporate income taxes the next most damaging tax for economic growth. In contrast, consumption taxes (such as VAT and the general fuel levy), because they do not distort savings and investment, have been shown to be less damaging for economic growth,” Mandy said.
“However, budget 2024 ignores the findings of these studies and does the exact opposite by raising personal income tax (to a new record level) and effectively further decreasing indirect tax (by not adjusting the general fuel levy upwards for inflation).”
He said that SA was forecast to obtain 39.6% (9.9% of GDP in 2024/25) of its main budget tax revenues from personal income tax, 25.6% from VAT (6.4% of GDP) and 16.2% (4.1% of GDP) from corporate income tax.
“At 9.9% of GDP, SA will have the 15th highest individual income tax burden in the world and by far the highest burden of all middle-income countries,” said Mandy.
He said that since the global financial crisis of 2008, the individual contributions of each of the three main taxes to the tax mix changed significantly. The personal tax contribution rose substantially while the contribution of corporate income tax decreased and the VAT contribution remained constant.
The upward trend in the personal tax burden was a result of substantial tax increases in each of the five fiscal years until 2018/19. These increases were aimed at raising more revenue and included below-inflation rises in tax brackets and rebates as well as the introduction of a new top rate of 45% in 2017.
“These increases did not, however, translate into the expected increased revenue collections, largely as a result of their adverse effect on consumption and spending, and therefore economic growth. Moreover, these tax increases have had an adverse effect on levels of tax compliance.”
He also pointed to the narrow taxpayer base in SA.
“While the rationale for the decision to raise the additional revenues from personal income tax in budget 2024 is understood, the grave risk remains that personal income taxes are collected from an already overburdened and increasingly small pool of (highly mobile skilled) taxpayers.”
“Just 490,000 taxpayers earning over R1m pay 46.7% of all personal income tax and 1.85million taxpayers pay 76.5% of the tax (out of a registered taxpayer pool of 14.2-million). Add to this the low-economic growth environment and high interest rates and the question is whether the proposed increases in personal income tax will result in the additional revenues sought or whether it will be selfdefeating.”
Lower-income earners would suffer most by not adjusting the personal income tax brackets for inflation. “The bottom line is that SA has exhausted its ability to extract higher taxes out of individual income taxpayers and that other sources must be looked at to raise the revenues that government requires,” said Mandy.
The most economically efficient and least harmful way to raise the tax revenues would be by way of VAT even though it was less progressive than personal income tax. Equity considerations could be dealt with through social spending.
SA had a relatively low tax burden from general consumption taxes and a relatively low VAT rate by global standards.