Budget: Gordhan’s give and take

AN ADDITIONAL R13 BILLION IN REVENUE IS NEEDED RIGHT NOW

Finance minister needs to raise an additional R13 billion from taxpayers – one way or the other.

Finance Minister Pravin Gordhan says he needs to raise an additional R13billion from taxpayers for Budget 2017/18 and an additional R43 billion over the medium term.

He has several tax options to raise the required tax revenue and close the revenue shortfall.

Revenue potential: R7.5 billion - R10 billion

PIT accounts for at least 35% of tax revenue and is buoyant due to higher-than-inflation wage increases, tax increases and reduced tax relief.

In SA, higher-income individuals pay a higher proportion of tax. So, if Gordhan were to turn to PIT, he would have to increase taxes for higher income earners.

One option to raise additional revenue is to introduce a 45% marginal tax rate for individuals earning above R1.5 million/ year. This could raise R7.5 billion-R10 billion. But a punitive tax rate might encourage aggressive tax planning or emigration.

Revenue potential: R0billion

In a weak macro-economic environment, Treasury is unlikely to increase CIT as this could result in base erosion and capital flight. Also, our corporate tax rate is already higher than most countries. Gordhan might lower the tax rate to attract investment and send a business friendly signal.

Revenue potential: R0 R15 billion

SA’s VAT rate is relatively low compared to most tax jurisdictions and there is less risk of tax avoidance and tax planning associated with this tax (see below).

Preliminary calculations by KPMG suggest that a one percentage point increase in VAT could yield R15 billion.

But an increase in VAT will have a negative impact on inequality, real GDP growth and inflation, and will be disliked by labour unions. Despite a high revenue yield, these factors make a VAT increase highly unlikely.

Revenue potential: R 5 billion R7 billion

Treasury is likely to hike sin taxes, particularly for luxury cigars, spirits and wines. In Budget 2016, this raised an additional R2.3 billion. Too big a hike might encourage black market consumption.

A sugar tax could generate R2.5 billion-R4 billion. However, it will be introduced at a higher effective tax rate than most countries and is set at higher rates than most wines and spirits. Any job losses could undermine PIT and CIT.

Revenue potential: R5 billion R7 billion

Treasury is also likely to increase the fuel levy, but not as much as the last two budget periods, when Gordhan raised R6.6 billion and R6.8 billion, respectively. Gordhan could also progressively provide reduced tax relief to raise short-term revenue.

In Budget 2016, Treasury raised R7.6 billion through this option.

However, lower-income groups are disproportionately hurt by an increased tax burden.

We also expect the minister to announce other progressive adjustments to wealth-related taxes, similar to last year’s changes to property taxes.

A combination of these tax measures should raise at least R13 billion in the 2017/18 fiscal year. Muziwethu Mathema is a senior economist at KPMG SA