Tax burden has become much heavier overall
Go back to the budgets of the early to mid-2000s and the constant refrain was that the government had managed to cut tax rates and give billions of rand in tax concessions back to taxpayers each year, thanks to better compliance and a broader tax base.
No longer. The overall tax burden has risen steeply in recent years as the government has sought to make up for faltering economic growth and shortfalls in revenue by raising effective tax rates.
This has been nowhere more stark than in personal income taxes, which accounted for 37.2% of tax revenue in the 2016-17 fiscal year, up from 34% in 2012-13.
The contribution of the other two big taxes — value added tax (VAT) and corporate income tax — declined over the period to 25.2% for VAT (from 26.4%) and just 18.1% (19.8%) in the case of corporate income tax.
The greater tax burden on individuals is the most striking feature of SA’s tax system in the post-financial-crisis era and has become narrowly focused on a relatively small group of high-income individuals.
PwC director for tax Kyle Mandy notes that just more than 80% of personal income tax is now paid by 25.7% of individual income taxpayers, compared to 78% paid by just less than 32% of taxpayers in 2002-03.
"The burden has been shifted on to a significantly narrower tax base over the last 15 years or so," says Mandy.
Standard Bank chief economist Goolam Ballim notes the contribution of households to the overall tax take has ballooned from 28% a decade ago to 38%.
Mandy points out that, at 10% of GDP the personal income tax burden is now at record levels last seen in 1999-2000 before reforms and reductions in rates of the early to mid-2000s.
In effect, those Trevor Manuel-era reforms have been almost entirely reversed.
From 1998 to 2002, the top marginal personal income tax rate was cut from 45% to 40% and the threshold was raised.
In the 2015 budget, the top marginal rate was increased for the first time in 13 years, to 41%. The top marginal rate was raised again in the 2017 budget, this time all the way back to 45% for individuals earning R1.5m a year or more. Those individuals, according to the budget documents, number no more than about 100,000.
Nor are the higher rates the only reason for the growing burden on individuals. Fiscal drag, the so-called stealth tax, has had a lot to do with it too in recent years. That is the phenomenon whereby individuals are granted inflation-linked pay increases which jump them into higher tax brackets.
The government has in the past adjusted the brackets to compensate for inflation and provide relief from this "bracket creep", but in recent years has granted only partial relief, so that effective tax rates have risen.
If no relief is granted, it is estimated fiscal drag would currently add as much as R17bn to the tax take. "Fiscal drag has been very meaningful in silently elevating the household tax burden," says Ballim.
The proportion paid by households has obviously risen too as the contribution from corporate income tax has declined. Corporate income tax is particularly sensitive to the economic growth rate, as well as to the commodity cycle, and as growth has weakened the contribution from corporate taxpayers has declined.
By contrast, VAT tends to be a lot more stable.
The effect of the changing tax mix has been to put the country increasingly out of line globally, especially when it comes to the mix of direct taxes — essentially corporate and personal income tax — and indirect taxes such as VAT.
Organisation for Economic Co-operation and Development (OECD) figures show SA’s personal income tax and corporate income tax burdens (measured as a ratio of GDP) are well above the OECD average. That is despite the fact that SA’s VAT rate is significantly lower than the OECD average – but countered, though, by the fact that SA’s VAT system is highly efficient, with few exemptions or zero ratings.
"The figures paint a picture of a tax mix that is out of sync with the OECD and even more with developing economies," says Mandy.
The Davis tax committee argued that if the state needed increased revenue "trade-offs associated with the choice of tax mix should be carefully considered in terms of their impact on inclusive growth".
The committee’s models show that an increase in personal income tax would need to be six percentage points, while the increase in corporate income tax would need to be five percentage points, in order to realise the same revenue as an increase in the VAT rate of just three percentage points.
"While there would be a negative impact on GDP and employment — particularly in the short run – the impact of a VAT increase on these two variables would be less severe than that of a rise in personal income tax or corporate income tax," the committee said in its macroeconomic report.
The steep increase in the burden on individual taxpayers has prompted concerns among economists, the National Treasury’s included, that not much more can be extracted from the personal income tax pot and that efforts to do so could further erode tax compliance.
A concern is that SA may have reached the top of the Laffer Curve – a concept developed in the 1970s by US economist Arthur Laffer – at which point the more the government hikes tax rates, the less extra revenue it collects, because there is less incentive to work and earn more, and/or because there is more incentive to avoid or evade paying tax.
As it is, the overall tax buoyancy rate has fallen in the past two years, with higher economic growth not generating higher revenue to the extent that it had in the past.
Between 2010-11 and 2015-16, each percentage point of GDP growth led to an average 1.23 growth in gross tax revenue – but in 2017 that tax buoyancy ratio fell to just 1.01. October’s medium-term budget policy statement said the Treasury had revised down its buoyancy assumptions for the medium term, particularly for personal income tax.
In the current year, though, the Treasury budgeted to collect R28bn from additional tax measures and that is clearly not going to be realised.
Mandy points out, too, that despite all the tax increases of the past three years, the tax-to-GDP ratio has stalled at about 26%, indicating a decline in compliance and/or in the effectiveness of tax administration.
So while a range of tax measures can be used to boost revenue over the medium term, SA’s tax policy makers will be looking carefully at the implications for growth, as well as the implications for tax behaviour as they craft the tax mix.