Will Tito tax you more – and how will he do it?
VAT may rise, and the income tax brackets and medical scheme credits are unlikely to be adjusted for inflation
NEXT WEEK Wednesday, Finance Minister Tito Mboweni delivers his Budget. As usual, it will be a delicate conjuring affair, this year taking into account a depressed economy, a widening gulf between what the government spends and what it brings in through tax (the budget deficit), the burden of loss-making state-owned enterprises, and political fall-out if certain announcements prove unpopular.
Although commentators differ in their Budget predictions, they mostly agree that tax increases will be manageable and, apart from a possible rise in value-added tax (VAT), there will be no huge shocks for the consumer.
The widening budget deficit will have to be addressed. Apart from improving the efficiency of tax collection, which is happening, the government needs to cut expenses or increase revenue, or both; otherwise, it will have to resort to greater borrowing. The more the government borrows, however, it can – like an over-indebted household – become caught in a debt spiral whereby a greater and greater portion of income goes to servicing debt.
Dale Cridlan, director at law firm Norton Rose Fulbright, says the public sector wage bill, which accounts for 46% of the tax revenue in 2019/20, has been specifically identified as an area where expenditure needs to be curbed.
He says President Cyril Ramaphosa has spoken about containing public wages and reducing wastage and irregular expenditure. “While these statements must be lauded, any changes to be made will take some time to filter through, and similar promises in the past have not been kept,” Cridlan says.
He says that personal income tax is the largest contributor to total tax revenue, but this burden is borne by a few.
“A publication by National Treasury and the South African Revenue Service reports that 703 104 taxpayers were liable for
R214 336 million, or 75%, of the total assessed personal income tax, for the 2017 year of assessment. Therefore, increasing personal income taxes does not appear to be sustainable.”
Cridlan says the corporate income tax burden is similarly borne by a few – only 380 large companies were liable for 57.2% of the corporate income tax in the 2017 year of assessment.
“At 28%, the corporate income tax rate is already on the high side, and any increase in this rate would only serve to discourage investment and reduce jobs.”
He says this leaves few avenues for revenue collection.
“Additional tax revenue will most likely be raised by foregoing inflationary adjustments to the personal income tax brackets and to medical aid credits. Increases in the tax on tobacco and liquor products and the fuel levy will most likely also be seen. This will, however, not raise sufficient additional revenue to plug the expected deficit.
“The rate of VAT in South Africa remains low in comparison to other countries, and it would not be surprising to see the minister increase the VAT rate by 1% or 2%. Although undesirable, this may be seen as the most viable way to reduce the deficit,” Cridlan says.
One thing the government must be cautious of, in imposing higher taxes, is depressing the economy even further.
Dave Mohr and Izak Odendaal, investment strategists at Old
Mutual Wealth, say although South
Africa’s real growth rate has been disappointing, hovering between 0% and 1% over the past few years, nominal growth (growth before taking inflation into account) has slowed dramatically, from about 8% to 4%. “This is lower than at the time of the global financial crisis. The government was not prepared for this. The 2019 Budget still projected nominal economic growth of more than 7% a year over the next three years. Each percentage point that nominal growth declines equates to roughly R50 billion in economic activity that is ‘missing’, and with it, about R12bn in tax revenue.”
Mohr and Odendaal believe major tax increases are unlikely. And they say a higher VAT rate, “which remains low by global standards at 15%, will probably wait for a stronger economy”.
Deborah Tickle, Adjunct Associate Professor in Tax at the University of Cape Town, says the minister may have to become “more creative” in finding ways to tax us.
One option would be to re-impose a form of retirement funds tax.
“Such a tax was in place from 1996 to 2007, when it was raising around R7bn. Tax was also raised on dividends paid to retirement funds up until 2012, but this is no longer happening, although it raised around R5bn a year. Although the removal of these taxes was well argued due to the need to incentivise retirement savings, perhaps they would be more palatable than the ‘prescribed assets’ suggestion government keeps talking about,” Tickle says.
Patricia Williams, tax partner at law firm Bowman, says higher taxes on the wealthy, without unduly burdening low- and middle-income consumers, may be a consideration. These could include a high top marginal income tax rate, capital gains tax at rates closer to income tax rates, taxes on luxury items such as supercars, private jets and yachts, and taxes on a broader range of financial transactions.