Tax committee making case for hiking VAT says some tax-free products are actually overwhelmingly bought by richer people
Professor Ada Jansen from Stellenbosch University’s economics department was the lead author on the paper the Davis committee used to demonstrate that VAT actually subsidises the rich.
But a 2013 research paper co-written by her argues that there is room to improve the zero-rating basket by excising the items that are mostly bought by the rich.
The last major tax inquiry similar to the Davis one, the Katz Commission of Inquiry into Taxation in 1995, recommended that the basket of zero-rated goods should be reviewed and adjusted on a continuous basis to maximise equity effects. But apart from the inclusion of paraffin in 2001, that never really happened.
Jansen’s case study looked at sales of fresh vegetables, such as mushrooms and lettuce. Both items are zerorated, but almost exclusively consumed by the relatively wealthy.
On the other hand, tinned fruit is an anomaly excluded from the list but overwhelmingly bought by the poor.
The Davis proposals show this is probably even more true for milk and fruit.
Where 0% VAT unambiguously benefits the poor more than the rich is when it applied to maize meal and brown bread.
The latest report couches the inordinate subsidy for the rich in real money terms, but that might also be missing the point.
Jansen’s earlier research stated: “While it is obvious that higher-income groups gain more from zero-rating in absolute terms because they spend larger amounts, poorer households gain more in relative terms.”
Speaking to City Press this week, Jansen said the 2013 analysis was “not arguing that zero-rating is the best way to target the poor, but rather that, if it is retained, targeted items should be reviewed”.
The premise is that zero-rating is here to stay for “political economy” reasons.
The case for improving the basket to better target the poor is also helped by the fact that most tax relief over the past decade happened through personal income tax, which bypasses the people who mainly pay tax through VAT.
The reasoning around VAT goes to the heart of the South African tax system’s treatment of rich and poor and the debate about how “progressive” the system is and should be.
A report by the World Bank last year is proving very influential on the work of the Davis committee.
The World Bank argument is that South Africa’s inequality is already being addressed to a far greater degree than is commonly admitted.
It calculates that government spending on free public services – health and education in particular – can be considered “income” for the poor.
By that reckoning, South Africa’s famous world-leading Gini coefficient is actually a lot lower than critics say.