John Maynard: Can high income earners keep propping up SA? Expect them to be milked harder – #Budget2017

From Corruption Watch - http://corruptionwatchconnected.org

The rich and high income earners must pay more to make up for the sins of white monopoly capital. This is the message President Jacob Zuma has been delivering in controversial comments designed to drum up political support. Blogger John Maynard, an economist who writes under a pseudonym, ponders whether the primary source of state funding is starting to run dry. Maynard expects the budget to contain more of the same this year: higher income tax, and possibly higher corporate tax, and higher sin taxes to cover spending on healthcare, education and other big state bills. South Africa has a very small tax base and these individuals are fed up with having to prop up a government that is increasingly corrupt and feathering the nests of a clique connected to Zuma. Emigration among higher income earners and entrepreneurs is evidently a growing trend, judging by the names of South Africans who are spending much time in London and elsewhere growing their businesses. Those who are determined to stay speak of boycotting taxes, though that won’t be an easy route, given that it’s illegal not to pay tax and non-compliance can create a very large headache. Maynard also hopes the government will come to its collective senses by halting aid to troubled state entities, like SAA. But with Brian Molefe – who lied to the public in connection with a state capture report and is evidently part of the ‘captured’ clique – rapidly gaining political power, it seems highly unlikely this wish will become reality in the short term. – Jackie Cameron

By John Maynard*

In today’s blog we take a look at what South Africans can expect when Finance Minister Pravin Gordhan presents his budget speech to parliament. In past articles we have written about the SA government milking the rich to the full, and we expect more of the same in this budget speech. Problem is that the teet it is milking will start to run dry. Be it by the rich leaving the country to get away from excessive taxes or tax revolts such as the refusal to pay E-tolls which is seen by many as a unneccessary tax over and above the already high tax burden of South Africans.

So where does South Africa’s government funds come from?

Well it’s main sources are Personal Income Tax (PIT), Corporate/Company Income Tax (CIT), Value added tax (VAT) and then other smaller sources such as customs and excise duties levied. The graphic below provides greater detail as to the breakdown of South Africa’s government sources of revenue. Where is government getting their money from?

From this it is clear that the majority of government’s funding comes from personal income tax. While this is not a problem in general, it is a problem for South Africa as it has a very small tax base. With not a lot of people paying taxes compared to the total size of South Africa’s population. Essentially few are paying for services delivered to many. And this type of funding model is not and never will be sustainable. Government needs to increase the size of the tax net to ensure a greater portion of the population contributes to state coffers.

Below is an analysis of the number of tax payers in South Africa and what percentage they pay of the overall personal income tax bill. The left gray block shows that percentage of tax payers. So 9.7% fall above the > 500 000 bracket, and they pay 36.9% of all personal income tax as shown by the gray block on the left. 51% of taxpayers fall in the grouping 70 000 to 250 000, yet they only pay 31.% of all personal income tax paid. We are all for a progressive tax system (taxed more as you earn more), but this looks to skewed towards punishing the rich.

Budget2017

One of our predictions for last year’s budget was an increase in the VAT rate from 14% to possibly 15%. We still think it is getting harder and harder for Treasury to avoid increasing the VAT rate. Sure the poor will complain, but government can easily make more items purchased regularly by the poor VAT exempt in order to lessen the burden on the poorest of the poor. But government has to look at increasing the rates of taxes other than that of personal income tax and company income tax.

With companies struggling in this tough slow growing economy, and consumers struggling even more, increasing the tax rates of either PIT or CIT will make life even harder for companies and consumers. Companies will have to endure increasing costs, and easiest way to save money is to lay off staff, which will not help South Africa’s persistently high unemployment rate.

Off course “sin taxes” will see significant increases again. Expect duties levied on alcoholic beverages and tobacco increase significantly. And with that retailers will bump up the price by even more than the duties (and when consumers query the price increases they will just blame the duty increases). This will then feed through into higher inflation numbers (see our CPI basket weights wheel). Alcoholic beverages and tobacco accounts for almost 6% of all consumers spending in South Africa. So significant price increases in this category will hurt inflation too.

We will see the fuel levy increase again. This after significant petrol price increases recently. So consumers will have to fork out even more for petrol and diesel.

Expect the Minister of Finance to announce that more tax loop holes are being closed in order to clamp down on those using these loop holes to avoid paying taxes or ones using them to lower their tax burden.

Additional funding for tertiary education will surely be announced by the Minister of Finance. Cost cuttings will have to take place to fund this, or money that was originally allocated towards something else will now be allocated to tertiary education.

We also suspect that healthcare will get additional funding (after the Esidimeni disaster that has come to the fore in recent weeks). Government will surely push youth employment again with tax rebates offered to companies that employ the youth. As idle hands will turn to crime to feed their families and loved ones.

Hopefully an announcement that the state coffers will no longer financially support any State Owned Entity (SOE). Especially those with Zuma buddies in them such as SAA with wrecking ball Dudu Myeni.

So in summary:

  • Increase in personal income tax
  • Increase in company income tax
  • Increase in sin taxes
  • Possible increase in VAT
  • ​Increase in the fuel levy
  • Additional funding towards Tertiary education
  • Additional funding towards Healthcare (after the whole Esidimeni massacre)

*The writer uses the pseudonym John Maynard. He has a Bcom (Hons) Economics degree from the University of Pretoria, and has been working in the economics and statistics related field for the last 10 years. A keen follower of South African economy and its stock market, with a few ‘alternative’ views on the South African economy and stock market, hence the reference to ‘rogue’ view on the home page.

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