BUSINESS NEWS - Tinkering with a tax system to meet social objectives such as the reduction of poverty and inequality is a noble idea – but there is need to tread carefully, especially in a country like South Africa.
The Davis Tax Committee, appointed by then minister of finance Pravin Gordhan in 2013, has done extensive work on which tax design will suit SA’s unique set of circumstances. Many of its recommendations are in line with international best practice.
The committee submitted 25 reports to the minister and provided advice and guidance on revenue-raising initiatives such as limiting fiscal drag for personal income tax, increasing the top marginal rate for personal income tax, increasing the capital gains tax inclusion rates, and increasing the fuel levy.
Developed countries, and more specifically member countries of the Organisation for Economic Cooperation and Development (OECD), have in the past used their tax systems to ease inequalities – with dire consequences in some instances.
Bert Brys, senior economist at the Centre for Tax Policy and Administration of the OECD, says countries have to introduce complex measures to reduce the heavy tax burden on individuals.
He argues that the effect of trying to use the tax system to reduce inequality is that the redistribution pie becomes smaller because of the tax burden – to the point that many no longer see the sense of participating in the labour market.
Brys likens the personal income tax burden in some countries to “extortion”; there have been cases where 60% of the total tax revenue came from personal income tax and employer contributions to social security.
Brys presented his views during a recent panel discussion organised by National Treasury in Pretoria. He warned South African policymakers against falling into the same trap as OECD countries which introduced social security systems to boost equality. The moves were accompanied by declines in redistribution through the tax system.
Transfers to people in need became less progressive. Citizens had to be incentivised to work rather than getting social assistance in the form of unemployment benefits.
Efforts to get people back into the labour market included the awarding of tax credits if people work a specified number of hours, which they can use to reduce their tax liability.
Cecil Morden, former chief director in the economic and tax analysis unit at Treasury, said the warning signal around social security taxes is one that the country should take to heart.
The introduction of a National Health Insurance and funding it through the payroll system might just be the last straw that breaks the camel’s back, he said.
Keith Engel, CEO of the South African Institute of Tax Professionals and former chief director of the legal tax design unit at Treasury, said the middle class is being squeezed. “Redistribution only affects the upper middle and never hits the top. Meanwhile, various forms of redistribution within and without the tax system already provide support for the poor.”
