After much speculation over the past few weeks as to how the Minister of Finance would ‘plug the deficit’ in his Budget Speech on 22 February 2017, he has chosen to rely on personal income tax (including trusts) by increasing the top-end rate from 41% to 45%, a dividend withholding tax increase from 15% to 20% (with immediate effect) and increased Fuel and Road Accident Fund levies.
Increase in revenue
The appropriate ‘tax mix’ for South Africa has also been a matter of discussion since the Davis Tax Committee (the DTC) issued its interim Macro Analysis report for public comment in June 2015. The issue of engaging the ‘appropriate lever’ to generate revenue was considered. The DTC released statistics which indicated that personal income tax and corporate income tax would need to be increased by 6% and 5% respectively, in order to generate the same increase in revenue as a 3% increase in VAT.
It is considered that a VAT rate increase would have a less negative impact on GDP and employment, since an increase in personal income tax may encourage a flight of skills and an increase in corporate income tax would be a serious disincentive to foreign direct investment. Despite the statistics, however, the Minister chose to rely on the same limited, ‘over-mined’ tax base of individuals and actually acknowledged that the brunt of the increase would be borne by about 100 000 taxpayers only.
We need to ask ourselves whether the Minister has engaged the ‘appropriate lever’ for South Africa today in fulfilling an urgent need to raise an additional R28 billion of revenue. The answer confirms that this was the populist choice but not necessarily the most sustainable option. There was mention that ‘the litmus test of our programmes must be what they do to create jobs’ but with no firm indication that the tax base of individual taxpayers will grow as a result of the proposed expenditure measures.
The increase in fuel levies is as regressive as an increase in the VAT rate, since every resident or visitor in South Africa who climbs aboard a taxi, bus or car will be paying more in order to do so. This will have a negative knock-on effect across the whole economy resulting in the same people paying more for the goods that they buy (albeit including additional VAT being collected therefrom).
Subject to tax
We also need to ask ourselves what would soften the blow to the 100 000 taxpayers left ‘carrying the can this year’? Responsible government expenditure is the answer but this was not promised. In fact, even if these taxpayers find alternative employment in foreign jurisdictions which do not seek to tax their income, and they spend 183 days outside South Africa in a 12-month period as a result thereof, instead of being able to reap the reward of that life choice, they will be subject to tax in South Africa going forward simply because the other country chooses not to tax their income. They literally have no option but to exit South Africa altogether.
Lack of economic incentives
Whilst foreign investors may favour the fact that the corporate income tax and VAT rates remain unchanged, they will be impacted by the increased withholding tax on dividends. Foreign investors who are not ‘put off’ by their reduced dividend flows may find the lack of economic incentives to stimulate the economy and create jobs reason enough to disinvest or question whether to invest in South Africa in the first place.
Time will tell if the new rate changes are able to ‘go the distance’ in plugging the deficit without the much needed incentive measures in the private sector to stimulate the economy and grow the tax base. The result is that the levers which were not pulled now may well need to be pulled in the future, which means that we have only achieved ‘extra time’ on the field for now but may ultimately lose the game in the end anyway.