Mercy for middle earners
Tax revenue short of target but Gordhan resists temptation to penalise everyone except those in top bracket
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.