Plug those tax gaps to make a decent dent in the budget shortfall

Where is the government going to find the R40bn of tax hikes which June’s emergency budget pencilled in over the next three years? It seems bizarre even to contemplate tax hikes at a time when tax revenue is tanking, in an economy that is not expected to regain pre-Covid crisis levels before 2023. Finance minister Tito Mboweni estimated in June that government revenue would fall R304bn short of February’s budget estimates, with the deficit blowing out to 14.6%. Latest monthly data from the Treasury show revenue is already R130bn behind budget for the first five months of this fiscal year — more than double the record shortfall SA recorded during the global financial crisis.

The picture is worse than even the Treasury’s bleak June projections, with revenue down more than 20% for the year to date. Though tax collections will pick up as the economy reopens and Covid concessions end, the shortfall could come in as high as R312bn, and R330bn for the year.

That doesn’t necessarily mean the deficit will end up higher than Mboweni’s 14.6% June projection, because there will be some underspending. But it’s not as if revenues are going to bounce back any time soon to lift the government out of its fiscal chasm. The three big taxes — personal income tax, value-added tax and corporate income tax — together contribute more than 80% of the tax take. VAT could recover quickly as people start spending again. But corporate income taxes never really recovered from the global financial crisis and they are even less likely to recover from this one in the absence of economic growth.

Though there are some bright spots, in precious metals companies in particular, the corporate tax base has been further eroded after years of stagnant economic growth and declining investment.

Likewise, personal income taxes, where 2.2-million job losses and the prospect that no-one is going to be hiring will do nothing to expand the tax base. True, the high-income earners who contribute much of the personal income tax take were not hit as hard by the crisis as lowincome earners were but even they are unlikely to see, any time soon, the kind of big bonuses or incentive payouts that have boosted the personal tax take.

The government has relied heavily on tax hikes since the global financial crisis to keep some semblance of discipline in the public finances and even now it’s trying for more. Tax details are likely to be revealed only in February’s budget rather than this month’s medium-term budget, when the focus will be on spending — in particular where Mboweni will find R230bn of spending cuts he needs to put the lid on the public debt over and above the supposed R160bn cut to the public sector wage bill.

But further VAT hikes are a political no-go area; corporate taxes are not an option in a very weak economy that is supposedly trying to attract investment: the personal tax burden is now at a record high, with an ever-smaller base of higher-income individuals paying ever higher rates. Wealth taxes in some form could well be an option the government tries, but they wouldn’t yield meaningful money. It’s hard to see any tax measure that would. Except one. Closing the tax gap is the only measure that would make a meaningful difference. Estimates out of the Davis tax committee are that the tax gap is well north of R100bn. That includes the illicit economy and outright tax evasion as well as more legal but aggressive avoidance schemes. Close some of that gap and the returns to the fiscus are enormous — not just this year but in years to come as the tax base is enlarged. But it takes specialised skills and technology to track dodgers. The Davis committee has recommended that a specialised unit be set up to tackle the gap. Sars commissioner Edward Kieswetter told parliament this week he needed an extra R800m. If that helps to get SA even a fraction of the R100bn, it’s surely a no-brainer.

Estimates are that the tax gap is well north of R100bn