Weekend Argus (Saturday Edition)
Government’s options to raise revenue
current environment.
“Of course, the other option is to cut expenditure. This aspect of the budget, however, is also inherently political, with significant pressures for increased spending stemming from new initiatives such as National Health Insurance, social security reform and higher education funding, while also having to contend with public-sector wage negotiations and bail-outs of state-owned entities,” Mandy says.
Maarten Ackerman, the chief economist at Citadel, agrees that, at some point, increasing personal tax rates becomes self-defeating. However, he says we often forget that personal tax rates were much higher than they are now in the 1960s and 1970s during the gold crisis and the sanctions era.
Ackerman says Scandinavian countries have high personal tax rates, but people are prepared to pay high taxes if they believe they are getting something in return, such as a high level of health care. It’s when people don’t see any positive results from paying more tax that they start to push back. However, he says that salaried employees, because they have income tax deducted from their paycheques, are captive to the system to a large extent.
There are ways people may legitimately avoid paying tax or defer paying it, Ackermann says. For example, if capital gains tax is increased, which is a possibility, people might defer realising their gains, such as postponing selling a property or cashing in an investment.
An additional income tax bracket targeting the wealthy or a mooted wealth tax on assets may see highnet-worth individuals looking at more tax-efficient structures for their money, and they may even consider taking up tax residency in offshore jurisdictions such as Malta and Mauritius, he says.
Ackerman agrees that an increase in VAT will provide the most effective solution, because everyone pays VAT and the government can tap into the informal sector. But such a move will be highly unpopular, so it will probably be the last thing the government would consider. He says a proposal by the Davis Committee on Tax Reform may provide a solution: a variable VAT rate, with lower rates on necessities and higher rates on luxury items.