How high can taxes go?
People are taxed to the hilt, with little room for upward movement.
People are now taxed to the hilt, with little room for more upward movement – and government’s overestimates on GDP growth prospects are not helping.
Come budget time, government habitually overestimates growth. That throws out budgeting forecasts and would help explain the R30.4 billion shortfall in revenue collection last year. Finance Minister Pravin Gordhan this week said the growth forecast of 1.3% for this year may be optimistic, but at least Treasury is transparent about it.
Soft soap
The problem is that government growth forecasts have become more PR than reality. That said, forecasts are notoriously difficult, and Treasury allows for a margin of error.
The gap between actual and budgeted growth rates has narrowed in recent years, suggesting more realism creeping in.
Could it be that South Africa is hitting the upper ceiling of what has become known as the Laffer curve – a theory by US economist Arthur Laffer that increasing taxes beyond a certain point chokes returns as income earners resent working for the government?
In seven of the last eight years, Treasury has overestimated growth, often by as much as a percentage point and, in one case (in 2009), by more than 2.5%. This has a ma- terial impact on revenue collections, since lower growth translates into lower tax collections.
Gordhan seemingly blamed last year’s revenue shortfall on the South African Revenue Services. But not everyone sees the revenue shortfall as a failure in tax collection.
“Now that government has moved the top marginal tax bracket to 45% for high income earners, this is going to drive these people away, or at the very least force them to look at any possible means of reducing their tax liabilities,” says Ian Cruickshanks, economist at the Institute of Race Relations.
He questions whether government has further scope for increasing taxes.
Economic growth has been declining for years without interruption, though most economists expect a small turnaround this year, helped in part by good rains that will lift agriculture from its slump, adding between 0.5% and 1% to economic growth.
“The only other factor that could lift economic growth is a sustained recovery in commodity prices such as we saw in the 2000s,” says Cruickshanks.
Gordhan’s budget was generally well received by business. But very little mention was made of another promised engine of growth – infrastructure spending.
End of the line
Government will likely face an uphill battle increasing tax collections in an economic climate of low growth or economic stagnation. Gordhan’s focus has shifted to the wealthy. A higher top marginal rate for the rich with limited bracket creep, will net an extra R16.5 billion this year.
Government may find it harder to reach its budgeted tax revenues if taxes are raised any higher. The question is: have we reached that limit?