ZEROING IN ON
The Davis Tax Committee chaired by Judge Dennis Davis is telling National Treasury what it likes to hear: VAT is good and zero VAT on basic foods is bad. An interim report on the VAT system was released for public comment this week after it landed on Finance Minister Nhlanhla Nene’s desk in December. It makes the case for increasing VAT from the current 14% as being a much better option than raising personal or corporate taxes – if government wants to raise taxes at all.
This repeats verbatim Treasury’s argument over the years that the zero-rating of basic foods is a hopelessly blunt instrument while the anti-poor regressiveness of VAT is probably exaggerated.
The Davis committee calls this a “perceived” regressiveness.
The usual argument is that VAT hits the poor hardest because they consume their entire income while the rich do not. In effect, they pay 14% VAT on all their income while the rich do not, making VAT the only tax that hits the poor harder than the rich.
Overcoming this objection to VAT is key if Nene wants to buttress state coffers because the tax is considered to be the best state funding mechanism on just about every other score. It is easy to administer and does not hurt the economy the way other taxes do.
The tax committee had Treasury model the effects of raising an extra R45 billion in tax using either VAT or income taxes ( According to Treasury estimates, to achieve this would either require VAT to rise from 14% to 17% or for personal income tax to rise by 6.1%.
Its report adds that the figures are random and not meant to indicate a recommended VAT rate.
Davis’ resounding judgement is that VAT is the way to go if you don’t want to do too much damage to the economy, and it will lead to a “very small” increase in inequality. The judge’s report also has nothing nice to say about the zero-rating system that leaves a selection of “basic foods” with 0% VAT. Zero-rating is specifically meant to address the regressiveness of VAT.
Not adding anything to the zero-rated list is the only suggestion in the report that is a “strong” recommendation.
If a way could be found to compensate the poor consumer for the higher cost of food, the zero-ratings should be scrapped, adds the report.
VAT contributes about a quarter of all tax revenue – last year it was R267 billion. About R19 billion is lost to zero-rating basic foods, says the report.
The zero-VAT rating amounts to a “generalised subsidy which mostly favours the richest sectors of the population at a high cost for public finances”, it says.
This sounds similar to former finance minister Trevor Manuel’s view in 2008 when he said: “Evidence suggests that existing VAT zero-ratings and exemptions in almost all cases confer substantially more benefits on middleand higher-income groups than on lower-income groups.”
This “subsidy” for the rich is particularly apparent with milk and fruit. They are zero-rated but are overwhelmingly consumed by higher-income groups.
The top 10% income group saves R208 million a year thanks to not paying 14% VAT on milk, while the bottom 10% only save R32 million, according to the tax report.
With fruit, the top 10% score R167 million while the bottom 10% a mere R14 million.
Despite this problem being clearly limited to certain items, the Davis committee does not spend any time in its report on refining the zero-rated basket.