Taxes : What does Nene have in store for us ?

Finweek English Edition - - INSIDE - ed­i­to­rial@finweek.co.za

For the first time in 20 years, South Africans are likely to face per­sonal tax in­creases as gov­ern­ment strug­gles to bal­ance its books.

In Oc­to­ber, when he de­liv­ered his medium-term bud­get pol­icy state­ment i n Par­lia­ment, f i nance min­is­ter Nh­lanhla Nene told the coun­try’s cit­i­zens to brace for in­creases.

In the months since then, an­a­lysts, econ­o­mists and (per­haps es­pe­cially) high-net-worth in­di­vid­u­als (HNWIs) have been spec­u­lat­ing about who ex­actly will be cough­ing up to close the gap. Nene’s 2015 Bud­get Speech on 25 Fe­bru­ary will f in­ally re­veal where gov­ern­ment hopes to find the R12bn needed to meet the bud­getary short­fall.

Kyle Mandy, head of na­tional tax tech­ni­cal at Price­wa­ter­house­Coop­ers (PwC), says this is ar­guably the most im­por­tant Bud­get Speech since the ad­vent of democ­racy in 2014.

Mandy ex­plains that the bud­get deficit has been stub­born for years now and we are at a tip­ping point (see side­bar on page 16). “South Africa is like a house­hold living be­yond their means and we all know that you can only live be­yond your means for a cer­tain amount of time be­fore you are in big trou­ble.”

Charles de Wet, a direc­tor in the tax ser­vices prac­tice at PwC, says it is im­por­tant that there are no big pol­icy changes as this could have a neg­a­tive im­pact on the econ­omy and re­sult in in­sta­bil­ity.

“We are stand­ing at the edge of a cliff and it is im­por­tant that we get the bal­ance right,” he says.

Stan­dard Bank’s chief econ­o­mist Goolam Bal­lim says gov­ern­ment’s ta x c hoices wil l be a del i c ate bal­anc­ing act be­tween the num­bers and pop­ulist choices that could af­fect the 2016 mu­nic­i­pal elec­tion re­sults. “Ul­ti­mately t he shape of public pol­icy choices is what is po­lit­i­cally most ac­cept­able. At t he cusp of the mu­nic­i­pal elec­tions, pop­ulist choices may pre­vail over more longterm sus­tain­able healthy eco­nomic de­ci­sions,” he says.

Gov­ern­ment’s great chal­lenge is f in­d­ing the in­come source that is least likely to ag­gra­vate the ma­jor­ity of its con­stituents, but easy enough to col­lect cheaply with­out stunt­ing eco­nomic growth. Gov­ern­ment has four choices, namely rais­ing cor­po­rate ta x, per­sonal i ncome ta x ( PIT), value-added tax ( VAT) or do­ing a com­bi­na­tion of the three.

“I f we j udge South Africa’s tax rev­enues across a spec­trum of mar­kets, some can ar­gue that South Africa’s tax rev­enue as a per­cent of GDP is not in­or­di­nately high or out of kil­ter and nei­ther too low,” Bal­lim ex­plains. This is true for both VAT and in­come tax, but not for cor­po­rate tax.

Cur­rently, most of the coun­try’s tax rev­enue comes from per­sonal in­come tax. This has made a steady re­cov­ery since the global fi­nan­cial cri­sis while cor­po­rate tax has strug­gled.

So where will the ad­di­tional rev­enue come from?

Mandy says that although many might as­sume that this mix means rais­ing PIT would be the eas­i­est so­lu­tion for Nene, but doubts this will be his first port of call. Even the high­est pos­si­ble i ncrease i n ta x for t he coun­try’s wealth­i­est would only be a dent in the ad­di­tional R12bn worth of tax rev­enue Nene needs.

“Even the in­tro­duc­tion of a 45% su­per tax rate for tax­able in­comes over R1m would raise only ap­prox­i­mately R7bn in tax.”

Mandy says in­creases in PIT would have a neg­a­tive ef­fect on the econ­omy, as this would be a dis­in­cen­tive to work, and stif le en­trepreneur­ship and sav­ing. Nene is look­ing to move to­wards a more in­vest­ment-led econ­omy and in­creas­ing PIT dras­ti­cally would have a neg­a­tive im­pact on the econ­omy.

It is the con­sumer who is likely to bear the bur­den of tax. In­creas­ing cor­po­rate taxes also seems un­likely.

“If we look at cor­po­rate in­come taxes, here it does ap­pear that South Africa is on the higher side. The like­li­hood of seek­ing ad­di­tional tax re­lief, that ad­di­tional R12bn, from cor­po­rates may ac­tu­ally ren­der us some­what un­com­pet­i­tive,” Bal­lim says.

VAT

That leaves VAT. Bal­lim says when it comes to VAT, we are at the lower end of the spec­trum, while pro­gres­sive tax prac­tices (on HNWIs) across the globe will give gov­ern­ment some lee­way to tam­per with cap­i­tal gains tax or even the mar­ginal tax rate. If it’s purely a num­bers game, the eas­i­est way to close the cur­rent ac­count deficit is by rais­ing VAT.

“If you were to shift the mar­ginal tax rate (on in­di­vid­u­als) from 40% to 45% and leave the tax bracket ad­justed in that as­sump­tion, you raise R7bn to R8bn. How­ever, a per­cent­age point

Even the high­est pos­si­ble in­crease in tax for the coun­try’s wealth­i­est would only be a dent in the ad­di­tional R12bn worth of tax rev­enue Ne ne needs.

in­crease in VAT will raise in ex­cess of R16bn. It does ap­pear to be a sin­gle line item with pro­nounced im­pact if it were ad­justed,” he ex­plains.

The ef­fi­ciency of col­lec­tion is also im­por­tant as low cost of col­lec­tion is one of the hall­marks of a good tax sys­tem, ac­cord­ing to Bal­lim.

Rais­ing VAT will af­fect the most num­ber of peo­ple and won’t have what Bal­lim calls the “pro­gres­sive sen­si­tiv­i­ties” of cap­i­tal gains tax or PIT, which have the eq­ui­table dis­tri­bu­tion of in­come at its heart. Even though a range of prod­ucts typ­i­cally con­sumed by South Africa’s poor­est, in­clud­ing brown bread, eggs, tinned f ish and maize meal will be im­mune to VAT in­creases, gov­ern­ment is likely to come un­der fire should this be its cho­sen path.

An­other as­pect to con­sider is the type of growth achieved by whichever choice gov­ern­ment makes. Bal­lim ex­plains, “I’m for con­sump­tion taxes be­cause it will give us a bet­ter qual­ity of growth out­come. Con­sump­tion is a poorer, if not the poor­est mul­ti­plier

in terms of growth. For ev­ery R1 of in­come that trans­lates into house­hold ex­pen­di­ture, the long-term mul­ti­plier is less than R1. Con­versely, for ev­ery R1 that is al­lo­cated to in­vest­ment it is plau­si­ble that you can gen­er­ate in ex­cess of R3 to­wards the long-term GDP. There are many rea­sons to be craft­ing a tax regime that is more en­cour­ag­ing of

the pro­duc­tion side of things.”

Mandy says benefits to in­creas­ing VAT in­clude:

Re­duc­ing re­liance on volatile cor­po­rate tax and there­fore sta­bil­is­ing rev­enue;

Dis­in­cen­tive to spend and there­fore a lower cur­rent ac­count deficit; and

An in­crease in sav­ings rev­enue as a re­sult of less spend­ing. If you have lower taxes on PIT then peo­ple have more money, but are less likely to spend it all due to the con­sump­tion tax.

If VAT were in­creased by one per­cent­age point, this could lead to ad­di­tional tax rev­enue of about R18bn to R20bn, ac­cord­ing to PwC es­ti­mates. If Nene were to con­sider this step, sig­nif­i­cant re­form would have to be phased in over a three-year pe­riod, Mandy says.

Fuel levies

Charles de Wet, a direc­tor in the tax ser­vices prac­tice at PwC, says the global drop in oil prices has cre­ated the per­fect gap for Nene. Mandy says that SA’s gen­eral fuel levy is rel­a­tively low by global stan­dards.

PwC es­ti­mates that an in­crease of 50c in the levy could see an in­crease in tax rev­enue of about R10bn. Mandy says Nene is only likely to in­crease it to about 40c to avoid a push back.

Ul­ti­mately, rev­enue in­creases alone are not enough and the com­mit­ment Nene made to c ut gov­ern­ment ex­pen­di­ture must be main­tained, Mandy says. In the past, ex­pen­di­ture has not been de­creas­ing at the same rate as in­creases in rev­enue.

“We need the po­lit­i­cal will to stop waste­ful, in­ef­fi­cient and cor­rupt spend­ing. The prob­lem lies in the fact that there is no buy in from the rest of gov­ern­ment,” Mandy says.

Even the intro 45%duc­tion of a su­per ta x rate for tax­able in­comes over R1m wo uld raise onl y ap­prox­i­mately R7bn in tax.

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