“This article was also published in The Star and Pretoria News on the Budget Day 25 February. As it turned out, The Treasury decided to increase the tax a little above R350,000 in taxable income per year it a little for taxable incomes below that limit (R840 more per month for an income of R1.5mn and R20-R50 less per month for incomes below R350,000). The net result to the fiscus was zero! In order words: The change in the personal income tax was revenue neutral. The increased revenue in the 2015/16 Budget comes from increased fuel tax and sin taxes.”
In face of the global crisis and lower than budgeted revenues, much has been discussed about the possibility of increasing income taxes. In the Mini-Budget last year, Finance Minister Nene announced tax increases of R44bn over three years.
This “will place a considerable additional burden on an already overburdened tax structure”, academics Rossouw, Joubert and Breytenbach recently argued in Business Day 7th of January. In November, a research report from the World Bank argued that “the fiscal space to spend more to achieve even greater redistribution is extremely limited”, but that “fiscal policy already goes a long way toward redistribution”.
AIDC has already sounded the alarm on the new rebasing of the poverty lines and the impact that this will have on economic policy. StatsSA has been asked by the government to abandon the 2007 recommendation from the Medical Research Centre and shift to the WHO standard for minimum food intake per day. This results in a R25 downward shift for all poverty lines. This critical shift was relegated to a foot note in the rebasing report. Poverty statistics suddenly places over a million citizens above both the line for extreme poverty and the politically sensitive Lower Bound Poverty Line (which by the way should be R511 we see now, even according to the StatsSA report, which added R335 and R176 to get “R501”!).
The World Bank report made an additional haircut of the statistics, effectively arguing that a person who spends R249 per day has been “lifted out from poverty”. This is 27 percent below the rebased food poverty line of R335 and 31 percent below the R360 that would comply with MRC’s recommendation.
On taxes, the voices of allegedly unbiased economists and opinion makers in the business press continue to sing in chorus. Their song is one of there being a “fiscal space” that is narrow, because of increasing state debt and lower revenues than budgeted. With a further line of how social grants, public wages and free basic service provision are about to push public finances over the “fiscal cliff”.
Behind these lyrics lies the assumption taxation has become harder. And for this reason tax increases will add a greater burden on the shoulders of South Africa’s small middle class and rich.
But there has been no tax squeeze. In fact, it has been the complete opposite. Illustrated in this diagram – for the reader to play with when listening to the Finance Minister – we have used a table published on page 44 in the 2014 Tax Statistics from the Treasury and StatsSA. We have only calculated how much less a person who have a taxable income above the R70 000 limits for personal income tax (PIT) had to pay 2013, compared to year 2000. This is the year when the Treasury started to tamper with the tax rates and make adjustments of tax brackets for inflation way over what was called for– a policy finance ministers marketed as a combat against “bracket creep”. In 2005, inflation was 3 percent, but the top tax bracket (over which the individual pays 40% in tax) was lifted by 33%.
The diagram uses the inflation adjusted income columns in Tax Statistics. It therefore compares how much lower tax that is paid 2013 for the corresponding life style in 2000.
The horisontal line shows the taxable income 2013. On the vertical line a reader with above R70 000 per year in taxable income can control how much more she would have to pay in tax that year – if the Treasury had decided to tax the same life style at the same rate every year. R1 million in taxable income 2013 rendered R84000 less in tax than the corresponding tax for the same life style in 2000. The straight line from R586 000 in taxable income can in fact be summarised in a formula: Political Tax Cut = R52 000 + 3%. A person with R5 million in taxable incomes would pay R202 000 more in tax 2013 if taxing this lifestyle had been left as it was taxed in 2000. From R280 000 to R586 000 the formula is something like R24 000 + 7.8%.
When the tax cut policy was pointed out to representatives from the Treasury by civil society at a seminar after the Mid Term Budget Policy Statement, the argument was that they have had a low income profile. Why? Well, in percentage terms (%), the tax cuts have been higher for individuals closer to the R70 000 than for the millionaires. For those of us that remember our Grade six mathematics teacher the question is: “Remember children, you must ask ‘Percent of what?’”
We don’t buy with percent, but with Rand. There is world of difference between a percentage point on R1 million than on R100 000.
And many small drops – for the rich not small at all – become a large flood. In 2013 alone, the Treasury has forfeited about R148 billion, because of the changed policy, and 20 percent of the tax forms have still to be assessed. This is R15 billion more than the whole budget for the public health sector.
To add R150bn or more to the budget today, the Treasury should have done: Nothing, except small adjustments of tax brackets at the rate of inflation.
Now, why did the government choose this policy?
There is always a tendency for the public sector to be a larger share of the whole economy (GDP) over time. This happens if a part of the tax system is progressive, i.e. taxes according to the ability to pay. In SA, living standard has increased for the top 20 percent during 20 years (in fact not at all for the majority). When that happens, you pay a little more in tax. You are still better and better off. You contribute more to the “common” and you hardly notice it.
Tax policy has curbed this spontaneous tendency. So far we can understand it, the government since long has had a bench mark that tax revenue to GDP shall be about 25%, first spelled out in the GEAR document from 1996. It was repeated in the 2012 Budget Speech as a “part of the budget framework”. It is a policy for a small state and it flies in the face of implementing a National Health Insurance (NHI). The NHI and the ramp up of the public health sector alone demands – as the Treasury has conceded – an increase of the tax revenue to GDP by at least 3 percentage points.
Instead of using a rule, it is instead critical that government budget and collect taxes according to the need of its people as demonstrated by the ever rising, more violent service delivery protests. Instead, year-on- year poor planning, implementation and corruption by government and its private sector allies has rendered communities being denied the very basic of their constitutional rights – to services such as water, sanitation, housing and electricity and increasingly their right to work.
To understand why it is that public services appear to be collapsing all around South Africa one has to understand that there has been, over the last 20 years, a sustained attack on the public service. This attack stifles any attempt by those within government who truly sought, in 1994, to create a more just and equitable and democratic South Africa via a vibrant capable state. From 1996 South Africans were told via the budget speeches that South Africa could become “ungovernable” unless a more “prudent” macro-economic policy was pursued. But this was not true at the time and does not hold true in 2015.
Minister Nene’s budget speech will, no doubt, ask South Africans to take “a little pain” to prevent political and economic catastrophe, despite there being alternatives. What austerity does is to cause further economic hardship and insecurity without providing the magic recovery.
Thokozile Madonko is Co-Director and Dick Forslund is senior economist at Alternative Information and Development Centre.