Cash-strapped high income earners don’t have more tax to give SA – Matthew Lester

EDINBURGH — Raising VAT is the only way the South African government will be able to raise enough tax. That’s the message from respected tax academic Matthew Lester, who explains why higher income earners will not be able to prop up tax coffers to the extent that is needed. The government has been squeezing the small and shrinking group of salaried citizens and has plans to wring more cash out of them. State capture, corruption and gross financial mismanagement of state entities like SAA have hammered South Africa’s finances. The economy is under pressure, unemployment is high. Add to this that pension fund provision is inadequate and it is evident that those fortunate to earn a healthy income are propping up parents, children and other dependents. Meanwhile, the state lays on very little for those who do pay tax, leaving it up to higher income earners to cover the rising costs of private education, healthcare and security. – Jackie Cameron

By Matthew Lester*

Its tough at the top!

Many years ago I headed off on my last fishing trip before returning to Johannesburg to face the depression that is January. One of my fishing mates commented “ I don’t know why you work all year so you can come fishing for one month in December. If you can live on less, you can fish all year?”

With the prospect of massive personal tax increases being announced by finance minister, Malusi Gigaba, in the national budget speech on 21 February 2018, perhaps this debate is as relevant as ever.

‘Always look on the bright side of life!’

Depending on how you look at it some South Africans have a pretty reasonable average tax rate. Even today.  That’s if you take the very generous retirement funds contribution tax deduction into account.

A man, a boat and the sea can live on that. The dogs can even join in if we eat the fish, don’t associate with riffraff, drive old bakkies and only drink on weekends! But there won’t be much left over for saving and investment.

The problem comes if you want more! Every additional Rand earned above R1,25 million does not qualify for the retirement fund deduction and is taxed at 41%. When taxable income exceeds R1,5 million pa the rate goes up to 45%.

And there is every chance that these rates will increase in the budget speech.

At the one end of the scale two children boarding at a top private school could scoff the whole lot.

On the other end, and less obvious is the enormous expectation placed on the higher end taxpayer today.

• Many have parents to support. The loss of the defined benefit pension fund is starting to bite as provident funds and other savings are exhausted long before the undertaker arrives. This responsibility can stay with taxpayers until they are into their 50s.
• It seems politically incorrect to to talk about ‘black tax’ and the family pressures that go with being an up and coming new South African. The handout list is endless for many.
• The utility costs of residential property have sky rocketed and can easily be as much as the monthly home loan repayment.

There are about 250 000 South Africans who earn more than a R1 million taxable income per annum. For most ‘its tough at the top!’ of the 56 million South Africans. Many are hopelessly in debt just from trying to provide for an extended family.

Increasing personal income tax rates, either through rate increases at the top of the table or by not applying sufficient fiscal drag adjustment at the bottom cannot raise more than R20 billion in 2018/19. Less than a third of the R60 billion plus that is needed!

In reality there is only one option left for Gigaba. Raise the VAT rate! By at least 3%! So there is enough to give half of it back by way of targeted meaningful interventions to protect the poor.

Or Gigaba can duck the issue and South Africa can continue with an unsustainable debt trajectory.

• Matthew Lester is an associate professor at the Rhodes Business School and a member of the Davis Tax Committee.