Mercy for mid­dle earn­ers

Tax rev­enue short of tar­get but Gord­han re­sists temp­ta­tion to pe­nalise ev­ery­one ex­cept those in top bracket

Financial Mail - Investors Monthly - - Budget 2017 - Stephen Cranston cranstons@fm.co.za

A big dis­ap­point­ment for trea­sury last year was the R15.2bn short­fall in per­sonal tax, com­pounded by an R11,3bn short­fall in Vat and R6,5bn in cus­toms rev­enue. Fi­nance min­is­ter Pravin Gord­han said it is not ideal to in­crease tax rates in a stag­nant econ­omy but ar­gues that fur­ther re­dis­tri­bu­tion of wealth is part of gov­ern­ment’s in­clu­sive growth strat­egy, and that the fis­cus is an ef­fec­tive tool for re­duc­ing in­equal­ity.

Gord­han has tried to limit the ef­fect of tax in­creases for those who earn be­tween R70,000 and R350,000 an­nu­ally. They do not es­cape al­to­gether as the bracket ad­just­ments and re­bate lev­els were in­creased by 1%. For ex­am­ple, more peo­ple will be join­ing the 26% tax bracket as the base was in­creased not by in­fla­tion — a pre­ferred tac­tic of Na­tional Party min­is­ters such as Barend du Plessis — but by 1%, to R189,881. The in­crease is ex­pected to raise an ex­tra R12,1bn.

The in­tro­duc­tion of a new top rate, by con­trast, is quite sym­bolic. An ex­tra R4,4bn will be brought in by the in­tro­duc­tion of a 45% top

mar­ginal rate, which kicks in at R1,5m. There are just 103,000 tax­pay­ers in this bracket but they al­ready con­trib­ute a quar­ter of to­tal in­come tax — and their share is ex­pected to grow from 25.5% to 26.3%.

The in­crease in tax credit is quite lean in com­par­i­son. The med­i­cal aid tax credit in­creases from R286 to R303 for the first three ben­e­fi­cia­ries and the an­nual limit for tax-free sav­ings ac­counts is up from R30,000 to R33,000.

An­drew Well­sted, head of tax at at­tor­neys Nor­ton Rose Ful­bright, says there might be more jus­ti­fi­ca­tion for in­come tax in­creases if the money was seen to be go­ing to work on in­fra­struc­ture.

But there were few com­mit­ments in the bud­get, other than some es­tab­lished in­fra­struc­ture projects such as re­new­able en­ergy and na­tional health in­sur­ance. The lat­ter seems to be still some way off.

“I am very dis­ap­pointed that the na­tional de­vel­op­ment plan ap­pears to have been for­got­ten,” says Well­sted.

Gord­han said SA’s democ­racy de­pends on the strength of its so­cial com­pact. While the pay­ment of taxes is a le­gal obli­ga­tion, the ef­fec­tive­ness of the tax sys­tem re­lies to a large ex­tent on the will­ing­ness of cit­i­zens to con­trib­ute.

He ad­mits this can­not be taken for granted in light of ris­ing public con­cern about cor­rup­tion, the waste of public funds and in­ef­fi­cien­cies in ser­vice de­liv­ery.

In the Au­gust 2016 Davis Com­mit­tee re­port, chair­man Den­nis Davis said per­sonal in­come tax was trans­par­ent and cer­tain, and fairest when com­bined with cap­i­tal gains tax. He said: “Per­sonal in­come tax is pro­gres­sive by de­sign — with those who can af­ford to pay pay­ing most. Re­dis­tri­bu­tion is en­hanced through ex­pen­di­ture pat­terns.

“The ar­gu­ment is that coun­tries with lower lev­els of in­equal­ity ex­pe­ri­ence higher, more pro­longed pe­ri­ods of eco­nomic growth.”

One use­ful pro­posal from the bud­get is to pro­vide ad­di­tional bur­sary sup­port to em­ploy­ees. If an em­ployee has an an­nual in­come of less than R400,000 and the em­ployer pro­vides a bur­sary to them or their rel­a­tives, the value of the bur­sary will not be tax­able in the hands of the em­ployee.

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