Politicians, faced with a R50bn revenue shortfall, want to avoid the pain of fiscal austerity. But it is not a simple choice between hiking the value-added tax (VAT) rate or introducing a new wealth tax: both are going to be required to prevent SA’s debt from spiralling.
The Davis tax committee is investigating the form a new wealth tax could take. It has received hundreds of submissions and aims to produce a draft report by the end of November.
Whatever it concludes, international evidence shows SA will be doing extremely well if it raises more than R6bn annually from a wealth tax.
This is just a drop in the ocean against the R50bn revenue shortfall expected for the 2017-18 fiscal year.
"The problem with a wealth tax in SA is that it would be levied on an incredibly narrow base," explained committee head Judge Dennis Davis. "A huge amount of wealth in SA is also tied up in retirement funds, and we are busy investigating the implications of that."
The committee is also concerned that a new wealth tax may penalise middle-class savings, and is aware that the South African Revenue Service (SARS) would need to institute a sophisticated system to administer it.
A more elegant approach might be to jack up estate duty, SA’s existing wealth tax. The committee estimates that if its estate duty reforms are implemented, the revenue generated from this tax would rise from R1bn to R5bn a year. Again, this is a measly amount relative to the hole in the national budget.
A one percentage point VAT increase, on the other hand, would raise R20bn, the committee estimates.
A key finding of the committee’s First Interim Report on VAT, released in mid-2015, is that the gap between the VAT collected in SA and the VAT due is just 6%. This is better than the typical VAT gaps found in Europe and Latin America and is partly because SA’s single-tiered VAT system is easy to administer. At 14%, SA’s VAT rate is also relatively low compared with the average in Africa (16%) and Europe (20%), suggesting that there may be room to raise it.
The trade union movement argued in its tax committee submission on VAT that tax reform was an opportunity to reduce inequality and mitigate hardship. It recommended that a further 20 "necessities" be zero-rated, including basic medicines, education, water and electricity.
This would cost the fiscus about R4bn a year but it would be recovered by levying a 20% VAT rate on luxury items like smartphones and expensive home appliances. The upshot would be a multi-tiered VAT system of 0%, 14% and 20%.
The committee concluded, however, that multiple VAT rates would complicate tax administration and argued that equity considerations were better tackled through the expenditure side of the budget.
It recommended at the time that no further items be zero-rated; that multiple VAT rates not be introduced; and that VAT rather than personal income tax) or company income tax be raised if necessary, even though this would result in a small rise in inequality.
"[We were] anxious that SA not introduce a two-tier system because our current system is very efficient, possibly the most efficient in the world," said Davis. A two-tier system "creates opportunities for arbitrage and inefficiencies".
However, given the fiscal crisis SA faces, Davis said the country might have to accept the "messy compromise" of a two-tier system that keeps zero-rating and a 14% VAT rate for a whole lot of basic goods but imposes another rate of, say, 18% on higher-value items. He estimated that such a "pragmatic" solution would raise R20bn more a year.
"It all comes down to the fact that we have to increase VAT," said Davis.
"Raising personal and company income tax isn’t going to get us there."
The problem with raising personal and company income tax is that it could prove counterproductive if it causes growth to slow further.
Citibank economist Gina Schoeman said the existing tax structure could probably raise R15bn quite easily but anything more than that could severely dent growth, fuel social unrest and worsen tax compliance.
"Pushing up estate duty would probably hurt most upper-income taxpayers the least," said BNP Paribas economist Jeff Schultz. But he, too, feared that any further increases to top-tier personal income tax rates could prove self-defeating.
Davis was excited about the opportunities presented by the Paradise Papers, the 13.4-million documents that identify those behind financial transactions flowing through 19 tax havens. He estimated that if SARS announced it intended to investigate the high net worth individuals and companies identified, a reopened voluntary disclosure programme could rake in R10bn.
Together, implementing the estate duty reforms (R5bn), introducing a new wealth tax (R5bn), a VAT hike (R20bn) and raising R10bn from voluntary disclosures could rake in about R40bn for the fiscus.
Such measures would not be painless but higher taxes, especially VAT, have become unavoidable in the absence of faster growth or meaningful spending cuts.
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