Tax hikes not a fix

REVENUE SHORTFALLS: SA MUST INCREASE ITS TAX BASE – EXPERTS

We are simply, as an economy, feeling overtaxed – Nishana Gosai. Moneyweb

Higher tax rates are not the solution to revenue shortfalls, a tax practitioner warns. Regan van Rooy’s Nishana Gosai agrees with the SA Revenue Service that everybody should pay their fair share of taxes and that tax compliance is important. “But when we are falling short on revenues the answer can’t be … ‘well we’ll increase the tax rate; we’ll put personal income taxes up to 45% and we’ll tax the people more’.”

Over the past two years, there have been growing concerns about a slippage in tax compliance, amid anger about wastage and corruption.

But Gosai says there is another reason tax compliance has deteriorated. “We are, as an economy, feeling overtaxed. We are taxed out.”

Treasury increased the VAT rate by one percentage point in April, a last-resort effort to stabilise SA’s deteriorating fiscal position. The top marginal personal income tax rate increased to 45% in 2017.

There have been ongoing warnings that SA must increase its small tax base. While lower corporate income tax rates have been introduced in some other countries – making SA less attractive by international standards – its weak fiscal position makes it difficult to follow suit.

Finance Minister Nhlanhla Nene this week warned that the economic contraction during the first six months of the year posed an “additional downside risk to tax revenue”, raising questions about SA’s ability to stick to its fiscal consolidation path.

Gosai says that although governments do not like tax incentives and there are debates about whether SA would get the economic stimulus it needs, it can play a role by broaden ing the tax base. The US has introduced significant tax reforms, and the UK is taking steps to ensure it doesn’t lose out after Brexit.

Old Mutual’s Wayne Fuller says the UK’s mantra is that it’s open for business. “The minute you are open for business and you have policies that back that statement up, you will attract corporates.”

The big corporates bring big jobs, high-paying jobs, and with that, tax revenues. Sadly, SA has lost value as a country and there’s also policy uncertainty, Fuller said.

Tax legislation must support the direction the country wants to go in, he added.

“If we want to create jobs, if we want to bring our unemployment down, and [if] we want to grow our economy, we need policies that support that, which are enabled by tax legislation.”