Efficient feeder for budget
In making recommendations on Vat reform, the Davis Tax Committee has chosen economic efficiency over the arguments of Cosatu, which sought to put redress at the heart of tax policy.
On the core issues, the committee, which was chaired by Judge Dennis Davis, accepted the best economic and administrative arguments for retaining the Vat system as it operates at present, in line with the views of business.
North West University Business School professor Raymond Parsons says the outcome should not be seen as a victory for one lobby group or another. The victory lies rather in the identification of the right future tax options for SA, based on meticulous research.
“Until now the SA tax system has not been perceived as a major obstacle to economic growth. But the current search for more tax revenue could easily result in the wrong tax mix being implemented in future, or in the tax system being distorted,” he warns. “If SA continues to find itself in a ‘low-growth trap’ in the years ahead, with negative implications for tax revenues, it becomes even more important to get the tax mix right.”
A key finding of the committee’s first interim report on Vat is that the gap between the Vat collected in SA and the Vat that is due (the Vat gap) is very small, at 6%. This is significantly below typical levels in Europe and Latin America, and speaks to both the efficiency of the SA Revenue Service and the design of the tax.
At 14%, SA’s Vat rate is also relatively low compared with the average in Africa (16%) and Europe (20%).
The committee recommends that no further zero-rated items be added to Vat; that multiple rates of Vat not be introduced; and that if government needs to raise taxes, it raise Vat rather than personal or company taxes even though this would result in a small rise in inequality.
The committee did not ignore equity considerations, but accepted the argument that these are better addressed through the expenditure side of the budget than by distorting the tax system.
In contrast, the trade union movement argued in its submission to the committee that tax reform was an opportunity to reduce inequality and mitigate socioeconomic hardships facing the working class and unemployed. It recommended that a further 20 “necessities” be zero-rated, including basic medicines, pay-as-you-go cellphone costs, public education, water and electricity. It would cost the fiscus about R4bn in lost tax revenue a year, it estimated, but this would be recovered by levying a 20% Vat rate on luxury items like decoders, satellite dishes, smartphones and home appliances above a certain price level. The upshot would be a multitiered Vat system of 0%, 14% and 20%.
In rejecting these recommendations, the committee found that zero-rating is “an extremely blunt and second-best instrument” for addressing equity considerations since, in absolute terms, the concession benefits affluent households the most.
But though it would be better to collect the tax revenue and redistribute the additional income through a targeted transfer to the poor, it concedes that it would be very difficult to eliminate the current zero-ratings entirely.
Instead, it strongly recommends that no further food items be zero-rated and that consideration be given to withdrawing zero-rating from items more obviously consumed by the affluent, like fruit and milk.
The committee could find no empirical evidence that higher rates on luxury goods meaningfully addresses equity in the Vat system. Instead, it found clear evidence that multiple Vat rates add significantly to the administrative burden of the tax.
According to Deloitte director Severus Smuts, when a higher Vat rate was introduced for luxury items in Namibia, administrative problems were encountered and it was eventually replaced with one standard rate.
The committee also notes that excise duties are already imposed on luxury items such as motor vehicles, upon which Vat is also levied. This goes some way towards addressing equity concerns.
When it comes to the macroeconomic impact of raising Vat, the committee found a clear trade-off between efficiency and equity. Raising Vat from the current 14% will have a very small negative impact on inequality, but will be much more efficient
‘‘ THE COMMITTEE FOUND A TRADE-OFF BETWEEN EFFICIENCY
AND EQUITY. RAISING VAT . . . WILL HAVE A SMALL NEGATIVE IMPACT ON INEQUALITY, BUT WILL BE MORE EFFICIENT ECONOMICALLY THAN AN INCREASE IN DIRECT
TAXES