When R28bn of tax increases were announced in last year’s budget — much of this in higher personal income taxes — there wasn’t much loud protest or debate. Nor was there in 2016, when the finance minister announced R18bn of tax hikes, about half of it from higher excise taxes.
Tax policy is not something that South Africans tend to debate very much, but one big plus of the controversy over the increase in the value-added tax (VAT) rate announced in last week’s budget is that it has the potential to put tax policy issues on the table in a useful way.
The increase is the first in a quarter of a century, but in percentage terms it’s a hike of under 1%, as Treasury officials are keen to point out. From 14% to 15% may be a 7% increase, but in reality you’re paying R115 including VAT for an item that previously cost you R114 — an increase of 0.87%. Not that that’s insignificant for a poor household, and the core questions being raised in the controversy around VAT are about the poor, all of which makes this a good time for a serious, evidence-based debate about tax policy in general and VAT in particular, with a focus on how best to target the poorest households.
It’s often argued that VAT is a regressive tax — in other words, the burden falls more heavily on the poor than the rich, because the poor tend to spend rather than save relatively more of their incomes — and in SA, with its high level of inequality, that’s long been an argument against hiking the VAT rate.
As it turns out, the South African evidence refutes that. Research by UCT professor Ingrid Woolard and her colleagues, as well as by the Davis tax committee, found that VAT is neutral to slightly progressive — in other words, hitting the rich more than the poor. And Wits’s dean of commerce, law and management Imraan Valodia and David Francis have found in a recent study that VAT in SA is definitely progressive, because of all the zero-rated and exempt items. Their study shows that the poorest quintile of households spend 9c of every rand they earn on VAT, but for the richest quintile the figure is 12c. The poor may be much less able to afford the 9c than the rich can afford the 12c, but in principle at least the "regressivity" argument against VAT doesn’t work in SA. One can ask whether hiking other taxes would be a better bet, but that’s a different debate.
One can ask too whether the VAT system should be even more progressive. That touches on an issue which is moving to centre stage of the controversy — whether more items should be zero-rated or exempt from VAT in order to cushion the effect of a hike on poor households. Nineteen basic foodstuffs are zero-rated, costing the fiscus R22.8bn a year in forgone revenue, according to the budget documents — which is coincidentally exactly what will be raised by a one percentage point hike in the VAT rate.
In addition petrol, diesel, paraffin and municipal rates are zero-rated while public transport and education are exempt from VAT, with the public purse forgoing a total of R56bn on zero-ratings and exemptions.
That makes it crucial that any more zero ratings be subjected to careful thought and research to ensure that they benefit poor people, and benefit them much more than rich ones. The problem with many of the existing zero-ratings — fruit and milk for example — is that the bulk of the benefit goes to richer households because they consume relatively more of these items. And there’s another issue here about normative approaches to healthy eating and whether they are justified. The 19 items, which include brown bread, fresh fruit and vegetables, and lentils — may be what policy makers would prefer the poor to eat, but not necessarily what they always do eat. It’s hard to see policy makers putting white bread or Fanta on the list, even if they are staples.
A bigger question is how much zero-ratings really do help poor households that can’t even afford to buy such items. The issue came up when MPs demanded that sanitary pads be zero-rated, prompting research led by the Department of Women that indicated many poor girls couldn’t afford sanitary pads at all and it would be far more effective simply to distribute them for free. Subsidies or vouchers should be looked at as an alternative to zero-rating.
Perhaps most important is not to lose sight of how efficient SA’s VAT system is. It’s a very simple system, with no multiple rates, and that makes collection relatively easy and certain, ensuring maximum revenue is collected from this source, which the government can then spend on social services, with government expenditure benefiting poor households to a far greater extent than it does rich ones. Complicating the system could risk cutting the amount available for pro-poor spending.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.