Since 2009‚ National Treasury has embarked on fiscal expansion to enhance the public sector’s infrastructure programme and support future economic capacity.
However‚ anaemic global economic growth over the past nine years has left the Treasury’s countercyclical expenditure programme unable to lift the GDP growth above 2% a year.
Consequently‚ a combination of slow growth and lower tax buoyancy reduced the in-year 2016-17 revenue estimate by R23bn. Without policy adjustments‚ gross tax revenue will this financial year fall short of budget 2016 estimates by R36bn for 2017-18 and R52bn for 2018-19. These budget deficits are leaving SA’s sovereign rating on the brink of being downgraded to non-investment grade.
To militate against this revenue shortfall‚ Finance Minister Pravin Gordhan announced in his 2016 medium-term budget policy statement that an additional R13bn for 2017-18 and an additional R43bn over the medium-term expenditure framework would have to be sourced through various tax increases.
We explore the minister’s possible tax options to raise the required tax revenue and close the revenue shortfall:
Personal income tax
Revenue potential: R7.5bn-R10bn
This accounts for at least 35% of tax revenue. It is largest source of tax revenue and the most buoyant since 2010. This is due to higher-than-inflation wage increases‚ tax increases and reduced tax relief. SA has a progressive tax system‚ which means higher income individuals pay a higher proportion of tax. Consequentially‚ this means if Gordhan were to generate significantly higher revenue‚ he would have to increase taxes for higher income earners.
One option to raise additional revenue is to introduce a 45% marginal tax rate for individuals earning above R1.5m a year. Based on preliminary calculations‚ Treasury can realise R7.5bn-R10bn using this option. However‚ high income individuals are often skilled and mobile. A punitive tax rate might encourage aggressive tax planning or incentivise them to relocate to countries with lower tax rates.
Corporate income tax
Revenue potential: zero
In the current weak macroeconomic environment‚ Treasury is unlikely to increase this tax as that could result in base erosion‚ capital flight and hence generate little revenue. Furthermore‚ increasing the tax rate will be uncompetitive. SA’s current statutory tax rate is already higher than those of most tax jurisdictions. However‚ there is room for Treasury to lower the tax rate to attract investment and send a business friendly signal.
Value-added tax
Revenue potential: zero-R15bn
SA’s VAT rate is lower than those of most tax jurisdictions and there is less risk of tax avoidance and tax planning associated with this tax.
Preliminary calculations by KPMG suggest that a one percentage point increase in VAT could yield about R15bn in additional revenue. However‚ the Davies tax commission’s first interim report on VAT highlighted that an increase in VAT would have a negative impact on inequality‚ real GDP growth and inflation. Furthermore‚ VAT increases will be disliked by labour unions. Despite a high revenue yield these factors make a VAT increase highly unlikely.
Specific excise tax
Revenue potential: R5bn-R7bn
Treasury is likely to realise additional revenue through higher-than-inflation adjustments in sin taxes‚ particularly in luxury products like cigars‚ spirits and wines. In budget 2016‚ this raised an additional R2.3bn. However‚ disproportionate increases in specific excise taxes might encourage black market consumption.
An excise duty on sugar-sweetened beverages was announced in 2016 and could generate about R2.5bn-R4bn.
However‚ this tax will be introduced at a higher effective tax rate than in most other countries with comparable taxes and is higher than that on most wines and spirits in SA.
Furthermore‚ any job losses and impact on industry growth will have negative second round effects for the personal and corporate tax bases.
Fuel levy
Revenue potential: R5bn-R7bn
Treasury is also likely to increase the fuel levy. However‚ with higher crude oil prices the minister will not have the same space to increase fuel levy compared with the last two budget periods‚ where he raised R6.6bn and R6.8bn‚ respectively.
Other adjustments
Additionally‚ the minister has the option of progressively providing reduced tax relief to raise short-term revenue. In budget 2016‚ Treasury raised R7.6bn through this option. However‚ failure to give tax relief over a sustained period is regressive as lower income groups are disproportionately hurt by an increased tax burden. We also expect the minister to announce other progressive adjustments to wealth-related taxes‚ similar to last year’s changes to property taxes.
"While it is impossible to predict the exact adjustments the minister will announce. .. we expect a combination of these tax measures to raise at least R13bn in the 2017-18 fiscal year."
TMG Digital
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