On Wednesday 28 February, a broad cross-section of South African civil society organisations (CSOs) called on Parliament to halt the proposed increase in value-added tax (VAT), demonstrating that such a move would make the tax regime more regressive, potentially violate the equality clause in the Constitution, and worsen already unacceptably high levels of poverty and inequality. They illustrated that more progressive alternatives exist.
These organisations presented a written and oral before the Standing and Select Committees on Finance in Parliament, regarding the revenue proposals in the 2018 National Budget.
The organisations argued that a reconsideration of the tax regime was not to be taken lightly and therefore not something National Treasury could unilaterally decide on, without proper public consultation. They therefore called on Parliament to exercise the powers given to it by the Money Bills Act of 2009, to place a moratorium on the VAT and fuel levy increases and set aside more time to deliberate on more progressive alternatives to addressing the revenue shortfall.
This can be achieved even if the broad parameters of the fiscal framework (including total spending and total revenue) are not reversed by Parliament.
“As civil society organisations we are alarmed at the regressive taxation measures proposed in the 2018 Budget Speech, particularly the proposed VAT and fuel levy increases. While we recognise the need to raise additional revenue for the national fiscus, the proposals made to Parliament by the former Finance Minister, Malusi Gigaba, make the tax regime more regressive and stand to exacerbate already unacceptably high levels of poverty and inequality and retard job creation and economic growth.”
The CSOs highlighted that tax can and must play a redistributive role in the economy, while ensuring sufficient revenue collection for pressing social needs. Yet the proposed 2018 budget not only increases the fuel levy and VAT, the least progressive tax instruments, but also opts to cut down on social spending in areas such as basic education, health care, housing, municipal infrastructure, informal settlement upgrading and transport. Such cuts will undoubtedly have negative consequences for service delivery and affect poor and working class communities the most.
In their presentation the organisations outlined how an examination of historical and projected tax trends, and a focus on narrowing inequality, provides alternative, credible solutions which the government must consider.
- Further increases to ad valorem excise duties on luxury goods and expanding the number of luxury goods covered by these taxes and/or the institution of a higher VAT rate on luxury goods;
- Reduce tax breaks that disproportionately benefit higher-income households (such as for pensions, savings and medical aid);
- An increase in the rates for personal income and corporate income tax, the effective rates of which have decreased dramatically since 1999;
- Increases to taxes on property and the introduction of wealth taxes.
“When proposing changes to the tax structure existing imbalances should first be noted so that priority can be given to correcting these, rather than worsening them through regressive measures such as VAT increases.”
The proposals made by the CSOs are based on the following facts:
- Personal Income Tax (PIT) rates have been in long-term decline, with a recent modest uptick.
- CIT rates have also been in long-term decline and are currently proposed to make up a declining share in the tax mix, from 17.9% in 2017/2018 to 16.7% in 2020/2021.
- Excise duty and ad valorem [H2] excise duties will remain largely flat as a share of revenue (despite large increases in their rates).
- Property taxes have fallen as a share of the tax mix from 2.7% in 2005/2006 to 1.3% in 2017/2018, well below international averages.
- Dividend tax will fall marginally, from 2.4% of total revenue to 2.3%.
- VAT will increase its share in the tax mix from 24.6% in 2017/2018 to 26.3% in 2020/2021, moving in the opposite direction of international trends.
- Fuel levy will remain high at 5.7 – 5.8% compared with 4.8% in 2014/2015.
These trends have resulted in significant foregone revenue. For instance, effective PIT rates for high-income earners have fallen considerably since 1999:
- A taxpayer earning R1.5mn today pays R110,000 less tax than she would have in 1999.
- A taxpayer earning R1mn today pays R90,000 less tax than she would have in 1999.
- A taxpayer earning R500,000 today pays R64,000 less tax she would have in 1999.
Contrary to the assertion by the former Minister of Finance, South Africa does not have high effective PIT and corporate tax rates by international comparison.
According to the World Bank, South Africa ranks 172 out of 213 countries for overall tax rates on corporations, where 1 has the highest company tax and 213 the lowest; this is also the fifth lowest rate in Africa. The effective tax rate paid by many large corporations is way below the nominal 28% rate, while it is the SMMEs who pay closer to the nominal rate.
Further, there is strong evidence that raising progressive taxes can shift income from capital to labour and from wealthier people too poorer people. Such shifts reduce inequality, improve social outcomes and increase economic growth.
The CSOs stressed in their presentation that the low taxation of wealth - in the context of 10% of the population holding 90-95% of household wealth in South Africa, and the accumulation of wealth under apartheid - was unconscionable.
In addition to raising these progressive taxes, VAT can be made more progressive, and raise additional revenue, by introducing a luxury tier for goods mainly consumed by the wealthy, as has been done in a number of other countries.
Further, the CSOs showed how zero-rated items play an important role making VAT less regressive and allowing poor people to better access essential food items. However, current zero-rating is not always optimally targeted and the list of zero-rated items need to be expanded to include daily essentials, especially those used by women and children.
The CSOs also raised issues regarding the processes associated with adoption of the Budget and Parliament’s oversight role in this regard, and the extremely limited timeframes for public participation.
The organisations also cautiously welcome the recent re-appointment of Finance Minister, Nhlanhla Nene, with the anticipation that he will push forward a pro-poor agenda that advances the progressive realisation of constitutionally mandated socio-economic rights.
“We hope the Minister will bring about financial stability after a prolonged period of looting from the public purse that has placed the country in a position of low economic growth, high debt, and low revenue collection. This has resulted in harsh austerity measures that, if not reversed or amended, will have significant negative impacts on the lives of poor and working-class people in South Africa.”
Following the public hearings on Wednesday, National Treasury will be briefing the Finance Committees on Friday, where it will have to respond to directly to these and other proposals.
We expect National Treasury to utilise this public forum to take both MPs and citizens into their confidence and unpack the evidence, assumptions and models that informed their recommendations something they have so far failed to do. We also expect Parliament to fulfil its role as the “national forum for the public consideration of issues” by insisting that all recommendations, including Treasury’s are properly interrogated, and ensure that the process is meaningful rather than considering these major decisions as a fait accompli.
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