The one blight on the Bud­get

Trea­sury pleads “in­for­ma­tion over­load” on slim So­cial Se­cu­rity Tax de­tails

Finweek English Edition - - Openers - GARTH THE­UNIS­SEN

THE ONE BLIGHT on Fi­nance Min­is­ter Trevor Manuel’s oth­er­wise well-bal­anced Bud­get was the vague but wor­ry­ing pro­posal to im­pose a manda­tory, earn­ings-re­lated so­cial se­cu­rity tax on all wage earn­ers by 2010.

How­ever, the part that got tax­pay­ers shaken and stirred was the reve­la­tion that the pro­posed tax could swal­low as much as 18% of a per­son’s salary.

Al­though the 2007 Bud­get Re­view ac­knowl­edges that the ap­pro­pri­ate rate and com­po­si­tion of a so­cial se­cu­rity tax would de­pend on the ben­e­fits it’s to fi­nance, it does seem to in­di­cate that Trea­sury is con­sid­er­ing a tax rate of be­tween 13% and 18%.

“In­ter­na­tional prac­tice in­di­cates that a rate of be­tween 13% and 18% on an ‘add on’ ba­sis would be re­quired to fi­nance re­tire­ment sav­ings, dis­abil­ity and death ben­e­fits, un­em­ploy­ment in­sur­ance and ad­min­is­tra­tive costs,” says the Re­view.

Ef­fi­cient Group chief econ­o­mist Dawie Roodt says a rate of 18% sounds “way too high”.

The other wor­ry­ing as­pect is the vague word­ing of the pro­posal. While it could mean that Trea­sury is se­ri­ously con­sid­er­ing im­pos­ing a tax of 18%, Ish­mail Momo­niat, deputy di­rec­tor-gen­eral of Fis­cal Reg­u­la­tion and Tax Pol­icy at the Na­tional Trea­sury, says the num­bers are “merely in­dica­tive”.

How­ever, his an­swer as to why such a far­reach­ing fis­cal pro­posal was re­leased with so lit­tle de­tail makes for in­ter­est­ing read­ing.

“We were wor­ried that there would be in­for­ma­tion over­load,” he says. “There was just too much in­for­ma­tion for peo­ple to han­dle. The Fi­nance Min­is­ter will be re­leas­ing a dis­cus­sion pa­per at Ned­lac’s of­fices in Rose­bank to­mor­row which will give greater de­tail [Fri­day, 23 Fe­bru­ary 2007].”

An­other tit­bit from the Bud­get Re­view ap­pears to in­di­cate that the pro­posed tax would only ap­ply to peo­ple earn­ing less than R60 000 a year.

“The ba­sic so­cial se­cu­rity fund­ing ar­range­ment could be lim­ited to earn­ings be­low the present Stan­dard In­come Tax on Em­ploy­ees thresh­old of R60 000 a year,” says the Re­view, though it does in­di­cate that manda­tory re­tire­ment tax could be levied up to a higher earn­ings thresh­old.

How­ever, Momo­niat says this is not the case. “The so­cial se­cu­rity tax will ap­ply to all work­ing peo­ple but will only ap­ply up to the de­cided thresh­old,” he says. In other words, if the thresh­old is R60 000 then peo­ple earn­ing above that amount will only pay so­cial se­cu­rity tax on the first R60 000.

But Momo­niat did stress that de­tails of the tax are still at the pro­posal stage. “We will also be putting in sev­eral tran­si­tional ar­range­ments to en­sure that peo­ple do not take too much of a hit on their dis­pos­able in­come.”

A fur­ther pro­posal is that peo­ple earn­ing less than R45 000 a year will re­ceive a wage sub­sidy from Gov­ern­ment to off­set their manda­tory so­cial se­cu­rity tax pay­ments.

Work­ers earn­ing up to R15 000 a year will re­ceive a sub­sidy equal to one-third (33,33%) of their an­nual wage (ie R5 000).

As this far ex­ceeds the 18% manda­tory so­cial se­cu­rity tax, it im­plies that the wage sub­sidy, which will take the form of re­im­burse­ment to the em­ployer im­ple­mented as a re­bate in the PAYE sys­tem, will es­sen­tially sub­sidise the em­ploy­ment of low-in­come earn­ers.

“That sit­u­a­tion would ef­fec­tively sub­sidise low-in­come em­ploy­ment and it’s hoped that this will stim­u­late greater em­ploy­ment in the econ­omy,” a Trea­sury of­fi­cial told Fin­week.

The sub­sidy for peo­ple earn­ing be­tween R15 000 and R45 000 a year will equal R7 500 mi­nus one sixth of their an­nual wage.

Es­ti­mates of the cost of this sub­sidy are be­tween R20bn and R30bn a year de­pend­ing on its cov­er­age – roughly the cost of one Gau­train each year.

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