SA still strug­gling with in­equal­ity, says study

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW -

SINCE the on­set of the new democ­racy SA used its tax re­sources to ex­pand so­cial as­sis­tance and in­crease spend­ing on ed­u­ca­tion and health ser­vices, thereby re­duc­ing poverty.

Achiev­ing greater in­come equal­ity has, how­ever, re­mained a chal­lenge. House­hold con­sump­tion in­equal­ity, mea­sured by the Gini co­ef­fi­cient, in­creased from 0.67 in 1993 to 0.69 in 2011, which is among the high­est in the world. This po­ten­tially ranks SA as one of the most un­equal coun­tries among mid­dle-in­come coun­tries.

In Novem­ber 2014 the World Bank re­leased its “South Africa Eco­nomic Up­date. Fis­cal Pol­icy and Re­dis­tri­bu­tion in an Un­equal So­ci­ety”. The up­date looks at the role of fis­cal pol­icy in ad­dress­ing poverty and in­equal­ity in SA and sets out to an­swer two main ques­tions, namely: (i) how do taxes and spend­ing in SA re­dis­tribute in­come be­tween the rich and poor? And, (ii) what is the im­pact of taxes and spend­ing on the rates of poverty and in­equal­ity in SA?

The anal­y­sis concludes that SA is man­ag­ing a size­able re­duc­tion in poverty and in­equal­ity through its fis­cal in­stru­ments com­pared to cer­tain other coun­tries. The up­date seeks to mea­sure the im­pact of fis­cal pol­icy on in­equal­ity and poverty in SA com­pared to 12 mid­dle-in­come coun­tries. Th­ese coun­tries in­clude a set of com­pa­ra­ble mid­dle-in­come coun­tries namely Ar­me­nia, Brazil, Bo­livia, Costa Rica, El Sal­vador, Ethiopia, Gu­atemala, In­done­sia, Mex­ico, Peru and Uruguay.

The up­date finds that the South African tax sys­tem is slightly pro­gres­sive, while spend­ing is highly pro­gres­sive. In other words, taxes in SA are borne by the rich, and the tax re­sources are redi­rected to the poor. This coun­try’s fis­cal pol­icy ap­pre­cia­bly re­duces poverty and in­come in­equal­ity, and rep­re­sents the high­est re­duc­tions in the emerg­ing mar­ket coun­tries un­der study. A tax is pro­gres­sive if the cu­mu­la­tive share of a tax paid by the bot­tom in­come earn­ers of the pop­u­la­tion is lower than its share in in­come. A trans­fer or spend­ing pro­gramme is pro­gres­sive if the cu­mu­la­tive share of the to­tal spend­ing on the trans­fer re­ceived by the bot­tom in­come earn­ers of the pop­u­la­tion is higher than its share of mar­ket in­come.

The South African fis­cal pol­icy ap­plies a mix of pro­gres­sive di­rect taxes and slightly re­gres­sive in­di­rect taxes which, if com­bined, re­sults in a slightly pro­gres­sive tax sys­tem. Di­rect taxes, in­clud­ing per­sonal in­come and pay­roll taxes, are pro­gres­sive as the rich pay a pro­por­tion­ally higher share of to­tal di­rect tax com­pared to their share of in­come. As th­ese taxes com­prise a rel­a­tively high share of GDP, they de­crease the in­come gap be­tween the rich and the poor.

SA has a steeper per­sonal in­come tax rate struc­ture, which peaked at 40% com­pared to 27.5% in Brazil. Although di­rect taxes here are pro­gres­sive they are less so than in other coun­tries. In­di­rect taxes are slightly re­gres­sive. The study concludes that the re­gres­siv­ity at the lower in­come lev­els largely re­flects the im­pact of ex­cises, as value-added and fuel taxes are pro­gres­sive. VAT, ex­cises on al­co­hol and tobacco, and the fuel levy com­prise 9% of GDP, or a third of SA’s tax base. VAT com­prises about 25% of tax rev­enue. SA’s in­di­rect tax bur­den as a per­cent­age of dis­pos­able in­come is rel­a­tively even across the in­come dis­tri­bu­tion com­pared with other mid­dle-in­come coun­tries. In Brazil and Mex­ico the over­all bur­den of in­di­rect tax­a­tion rises more pro­gres­sively with in­come than in SA.

SA’s fis­cal pol­icy achieves the largest re­duc­tions in poverty and in­equal­ity of the 12 coun­tries stud­ied. SA’s fis­cal sys­tem el­e­vates 3.6-mil­lion peo­ple from poverty — ie those living on less than $2.50 a day (pur­chas­ing power par­ity dol­lars) — which re­duces the rate of ex­treme poverty by half.

The pop­u­la­tion living on $1.25 a day or less re­duces from 34.4% to 16.5%, as a re­sult of the im­pact of cash trans­fers and free ba­sic ser­vices net of taxes. In­come in­equal­ity is re­duced from a sit­u­a­tion where the in­come of the rich is more than 1,000 times higher than that of the poor to about 66 times higher. This de­creases the Gini co­ef­fi­cient from 0.77, pre-taxes and so­cial spend­ing, to 0.59 post fis­cal in­ter­ven­tions.

How­ever, in­equal­ity re­mains higher than all the other coun­tries in the study be­fore they ap­ply fis­cal poli­cies. SA’s pop­u­la­tion living in poverty — 33.4% — is higher than in many other mid­dle-in­come coun­tries with sim­i­lar lev­els of GNI per capita. The poverty rate, for ex­am­ple, is 11% in Brazil and 4% in Costa Rica.

SA, com­pared to mid­dle-in­come coun­ties, gen­er­ates con­sid­er­able tax rev­enues for po­ten­tial re­dis­tri­bu­tion. More than 50% of South Africans’ tax col­lec­tions of 27.1% of GDP in 2010-11 came from di­rect taxes, in­clud­ing per­sonal in­come tax, cor­po­rate in­come tax and pay­roll taxes in the form of un­em­ploy­ment in­sur­ance and the skill devel­op­ment levy.

The study also shows that this coun­try re­lies more on per­sonal in­come tax and less on in­di­rect or con­sump­tion taxes than the other coun­tries stud­ied.

SA’s gov­ern­ment spend­ing of 32.2% of GDP in 2010-11, ex­clud­ing in­ter­est pay­ments, ex­ceeds the av­er­age of mid­dle-in­come coun­try of 27.6% of GDP. SA’s gov­ern­ment so­cial spend­ing (as a per­cent­age of GDP) is higher than most of the coun­tries stud­ied.

SA also spends rel­a­tively more on ed­u­ca­tion and less on health and di­rect cash trans­fers than coun­tries such as Brazil, but has more di­rect cash trans­fers than Bo­livia. SA spends more than 50% of its ex­pen­di­ture on so­cial spend­ing. Dur­ing the past decade, the num­ber of so­cial grant ben­e­fi­cia­ries al­most dou­bled (from 8-mil­lion in 2003-04 to 15.8-mil­lion in 2013-14), re­flect­ing the ex­pan­sion of di­rect cash trans­fers to chil­dren and the el­derly.

SA’s fis­cal pol­icy goes a long way to­wards achiev­ing in­come re­dis­tri­bu­tion but poverty and in­equal­ity in this coun­try af­ter taxes and spend­ing re­mains too high. How­ever, more needs to be done to im­prove the qual­ity of ser­vice de­liv­ery although SA’s fis­cal deficit, and debt lim­its the fis­cal space to spend more to achieve even greater re­dis­tri­bu­tion.

Ad­dress­ing poverty and in­equal­ity in the fu­ture in a way con­sis­tent with fis­cal sus­tain­abil­ity will re­quire higher and more in­clu­sive eco­nomic growth. This would need to fo­cus on job cre­ation and nar­row­ing the in­come gap be­tween the rich and the poor and re­in­force the ef­fec­tive­ness of fis­cal pol­icy.

World Bank up­date notes SA’s fis­cal pol­icy is on track for in­come re­dis­tri­bu­tion, but more needs to be done SA re­lies more on per­sonal in­come tax and less on in­di­rect or con­sump­tion taxes than the other coun­tries stud­ied

Ferdie Sch­nei­der is head of tax at BDO South Africa.

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.