When the Davis tax committee called for public submissions on a proposed wealth tax in 2017 it received more than 300 submissions. By contrast, when it called for submissions on value-added tax (VAT) a few years ago, just 22 arrived.
It’s a measure, perhaps, of the extent to which VAT had fallen off everyone’s radar screens over the past quarter century since the VAT rate was last increased. But the budget proposal to raise the VAT rate by one percentage point has evoked huge controversy, much of which relates to questions of income and wealth inequality, the same questions that call for a wealth tax target.
Much energy and research is now at last going into the tax, which contributes a full quarter of government revenue.
It is raising some intriguing questions about how best to tax and target to ensure fiscal policy reduces rather than increases inequality.
Some of that thinking was on show in a VAT seminar at the Wits University School of Economic and Business Sciences, where there were unexpected areas of agreement between two academics on broadly opposite sides of the argument.
One was on the key issue of whether VAT is indeed a regressive tax, which hurts the poor more than the rich.
The perception that it is has been one of the big reasons the VAT rate has been politically untouchable until now, and it was a key concern raised in recent parliamentary hearings on the VAT increase.
VAT isn’t regressive, says Wits commerce, law and management dean Imraan Valodia, one of the panellists at the seminar who, with David Francis, did analysis based on income distribution and VAT data. The analysis refutes the regressivity argument. They found that the poorest households spend a lower proportion of their income on VAT than the richest do and they calculate the richest 10% of income earners will pay R13.6bn of the R22.9bn in extra revenue that the government expects to raise with the one percentage point hike in the VAT rate, with the top three income bands paying more than 85% of the increase.
Valodia suggests the government should consider increasing the VAT rate even more, but route the extra revenue to poor households through pro-poor spending or a tax credit system.
Unexpectedly, the other panellist, head of the Wits centre for the study of industrial development Gilad Isaacs agreed that VAT is not regressive. Isaacs, who led a submission to Parliament by a group of civil society organisations that opposed the VAT hike, had previously argued that VAT was regressive.
The government should consider increasing the VAT rate, but route the extra revenue to the poor
He does argue, and Valodia agrees with him, that the indirect taxes taken together are regressive, hurting poor households relatively more than rich ones. Excise taxes on tobacco and alcohol are regressive because poor households, sadly, consume more of these goods. So too are fuel taxes. And while Isaacs concedes that VAT itself is not regressive, he argues that the effect of hiking the VAT rate, rather than using personal or corporate income tax hikes, will be to make the tax system as a whole less progressive — not good in a country with SA’s high levels of inequality.
A more interesting debate that’s being fleshed out is about whether the list of items that are zero rated for VAT should be expanded beyond the current 19 basic foods plus items such as paraffin. The Treasury is to convene a panel of independent experts to investigate the potential to expand that list. It is zero rating that makes VAT less regressive, but it’s not always optimally targeted to benefit the poor rather than the rich.
Isaacs and the community organisations argue that the list should be expanded to include items that poor households typically consume such as white flour, canned beans, margarine, chicken, candles and soap — as well as polony.
The evidence shown by Valodia and the Treasury is that zero ratings on fruit, milk, eggs and lentils proportionally benefit high-income earners much more than low-income earners, though the zero rating on dried beans, samp, paraffin, mealie meal, sour milk and brown bread is well targeted to poor households.
Valodia notes that zero ratings are effectively a subsidy, so care should be exercised in who it goes to.
He and Isaacs agreed on the need to hike the corporate income tax (CIT) rate. That pits them against the Treasury, which argued against increasing CIT at a time when other countries are cutting it. Isaacs wants a more progressive mix of taxes.
Valodia argues that hiking the CIT rate by two percentage points would yield an extra R13bn and would help to build consensus on a VAT hike and demonstrate that the private sector is serious about equitable growth. The next frontier for debate about tax policy could well be CIT.
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