VAT hike will hit the poor hardest as their spending power is eroded
The regressive tax increase will worsen poverty and increase inequality — and there are viable alternatives, writes Gilad Isaacs
The value-added tax (VAT) hike announced in the budget speech threatens to erode the spending power of poor and lower-income households, worsening poverty and increasing inequality. VAT, charged on most goods and services at a rate of 14%, is levied irrespective of how much the consumer earns, making it a regressive tax. Taxes on goods (VAT plus excise duty) hit the poor hardest. The lowest-earning 10% spend 13.8% of their disposable income on these taxes compared to 12.6% of the highest-earning 10% in the country. The Davis Tax Committee has conceded that raising the VAT rate would increase inequality. It would also make basic goods more expensive and necessitate a proportional increase in social grants and wages to maintain the buying power of the poor. The statistical model used by the Treasury to support a VAT increase rests on highly improbable assumptions. While VAT is successful if considered solely from the perspective of revenue-raising, ignoring its potential negative effe...
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