The South African government should abandon its policy of pegging total tax revenue at 25% of GDP, says Dick Forslund, economist at social justice organisation the Alternative Information and Development Centre (AIDC). “It should rather implement a progressive tax system where individuals who earn more pay a larger share of their earnings in tax.”
In the run-up to Finance Minister Pravin Gordhan’s Mid-term Budget Policy Statement (MTBPS) the AIDC showed how government has lost out on billions of rand in possible income tax revenue due to its “self-imposed”, restrictive tax policy. “Tax statistics of 2011 shows South Africa could have had at least an additional R125bn in tax revenue in the 2010/11 fiscal year alone (compared to 1994/95), had it refrained from the substantial cuts in personal income tax,” Forslund says.
The so-called tax-pegging policy was introduced in the 1996 Growth, Employment and Redistribution (GEAR) plan. Essentially, it means taxes such as personal and corporate income tax, fuel tax, VAT and various other taxes can’t exceed 25% of the gross domestic product (GDP) — if it does exceed 25% government will provide tax relief to individuals and companies, which negatively impacts on the fiscus.
“In budget speeches, finance ministers have often argued the reason for annual tax cuts is compensation for inflation,” Forslund says, “but since 2000, when tax rates for top income earners were cut from 45 to 40%, the tax relief has far exceeded compensation for inflation. Treasury likes to posture personal income tax relief as something that’s beneficial to lower income groups, but in rand-terms it benefits the higher income groups.”
South Africans’ tax burden is significantly lighter than it was in 1994, Forslund says. “Personal income tax is becoming less and less progressive and it leaves individuals with much more of their personal income to use for consumption.”
On the other hand, the tax-pegging policy limits the size of the public sector and the scope for government intervention: it increases the need for government to borrow money to finance big infrastructure programmes and pushes up electricity prices and necessitates other sources of income, such as toll roads.
“It’s not economically viable to have a high quality public sector if government continues pegging tax,” Forslund says. “Government will never be able to implement its planned national health insurance (NHI) by keeping the tax revenue to 25% to GDP. It should rather keep tax rates on individuals and companies at a constant percentage and adjust income tax brackets in accordance with the inflation rate.”