Tax com­mit­tee mak­ing case for hik­ing VAT says some tax-free prod­ucts are ac­tu­ally over­whelm­ingly bought by richer peo­ple

CityPress - - Business -

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.

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