Taxes : What does Nene have in store for us ?
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.
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.
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.