Fair share of the load
SA can find a way to increase taxes — if the state needs more revenue — while also minimising pain to the economy
Tax increases are always an emotive subject. More so for Vat, national treasury’s secondbiggest source of tax income behind personal income tax. It has accounted for a bit more than a quarter of total tax revenue over the past decade. The main argument against an increase in the Vat rate is that this tax is usually regressive. According to a website, Tax Research UK, “a regressive tax is one where the proportion of an individual’s income expended on that tax falls as they progress up the income scale.”
This may be true in the UK, as the author of Tax Research UK maintains. In SA, the situation is more nuanced. A February 2015 study by Ingrid Woolard and a few colleagues published in a World Bank paper titled “The distributional impact of fiscal policy in SA”, shows that Vat in SA is broadly neutral.
This means that households across the income brackets pay roughly the same proportion of their income on Vat.
SA has very high levels of income inequality. For example the top 10% of income earners account for 56,66% of all disposable income. This level of inequality is not desirable, for many reasons, including longterm social stability.
However, it cannot be fixed through the tax system. Woolard and her colleagues found that Vat does not make inequality better or worse in SA.
With the inclusion of zerorated goods, Vat becomes slightly progressive. Using Statistics SA’s Income & Expenditure Survey for 2010/2011, one can see that the top 10% of income earners pay around 59,56% of all Vat in SA.
This shows that higher income earners pay a slightly higher proportion of their income on Vat when zero-rated goods are taken into consideration than lower income earners.
As an aside, the authors found that excise duties are regressive. The poorest 50% of the population earn only 7,32% of all income — but they pay 21,2% of all excise duties. This is because poorer households allocate a greater proportion of their spending to cigarettes and alcohol.
When the study took into account all taxes (personal income tax, payroll taxes, Vat, excise taxes and the fuel levy) and transfers (including cash transfers, free basic services and the monetised value of education and health), they found that fiscal policy reduced the market income Gini coefficient from 0,771 to 0,596 — a massive decline of 17,5 Gini points. Around 3,6m individuals are lifted out of poverty (less than an adjusted US$2,50/day) by fiscal policy.
In a preliminary report released last week, the Davis tax committee found that increasing Vat was the least bad option open to SA. While they found that a three percentage point hike in the Vat rate (which raises an extra R45bn/year) would very slightly increase income inequality (by 0,013), the negative impact on GDP growth would be only -0,65% in that year.
By contrast, if personal income taxes or corporate income taxes were hiked to increase revenue by R45bn, GDP growth would reduce by 1,44% and 2,64% respectively.
In turn, lower growth would then have a big negative impact on government revenues — largely nullifying the revenue benefits of the tax hike.
SA’s fiscal policy does more than other middle-income countries to improve inequality and reduce poverty. Despite this, the levels of poverty and inequality are still high.
Unfortunately, fiscal policy cannot do much more. We need growth and a vast improvement in education to reduce inequality sustainably.
This means that the best solution to close the budget deficit is to control (or cut) spending. If more revenue is needed for a particular project — like National Health Insurance — then Vat is the revenue-raising measure that has the smallest negative impact on growth.