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As the effects of the Covid-19 pandemic hit economies worldwide, South Africa sits between the proverbial rock and a hard place: medical imperatives versus harsh economic realities. John Kinsey, a retired financial services expert, has been watching the effects of the lockdown with mounting concern, and has some ideas about taxation that might create jobs and get the country going again. – Renee Moodie
By John Kinsley*
Two weeks into the original lockdown in mid April 2020 I wrote a short piece entitled ‘Flatten the Curve – But Mind The Gap’. My core argument was that while we needed to be very aware of the medical imperatives, we had to balance that with the reality of the economy as well.
Three months later and my worst fears appear to have been realised as we face a possible decline in GDP of more than 10%, while initial figures show 3 million people may have lost their jobs and many businesses have closed down completely. Some even argue that more people may die of poverty related issues over the next few years in SA than from the virus itself.
So what now? Surely we cannot just freeze like the proverbial deer in the headlights.
‘Debates are often stuck between competing ideological positions rather than developing and driving real practical ideas to grow the economy, improve productivity and provide jobs’ (my underlining).
Government has begun to speak about bold infrastructure development plans to encourage growth and employment. But these plans, as necessary as they are, only tend to have a noticeable impact over the medium to long term. We desperately need some short-term wins as well.
Here are some immediate ‘quick wins’ which I believe could have an almost immediate economic and psychological impact (and we need both right now!) to help arrest the ongoing downward economic spiral:
- Cut VAT to 0% on most food products and basic items. I won’t list the items here but it is fairly obvious what sort of items should be included so as to extend the current zero rated list quite substantially. Hopefully this will give a little more breathing space to the poor. Any retailer found to be increasing prices to try and take advantage of this VAT reduction should be named, shamed and charged if need be.
- Cut company tax for all small and medium sized businesses with annual turnover less than R500 million to just 14% (i.e. by 50%), provided they grow their workforce by at least 10% per annum over the next 5 years. This should be measured as part of the annual audit for each qualifying company.
- Remove the minimum wage completely for all companies with a turnover below R500 million for the next 5 years, after which time a glide path can be agreed back to the minimum wage level provided overall unemployment in SA has reduced sufficiently. Just having a job at the moment is critical.
What will this achieve?
Well, if you look at the table below a basic manufacturing business with an annual turnover of R200 million, employing 50 largely unskilled staff and a net profit margin of just 5% before tax, made a profit after tax of R7,2 million last year. But if that company grows turnover by just 5% and under the new incentive employs at least another 5 people over the next year at average monthly salaries of say R3 000, the net profits after tax will jump to R8,9 million by 2021.
Assumptions: 1. Turnover growth is compounded at 5% pa 2. PBT is calculated on a 5% margin plus the cost of new employees in 2021-2025 3. Current company tax rate is 28% 4. Incentive company tax rate is 14% 5. Extra staff begin at an average monthly wage of R3000 in 2021, rising to R3500 by 2025
By 2025, assuming the same turnover growth and profit margins and with staff growing by 10% pa, the profit after tax will have grown to nearly R10 million (or by 38% over the period). But, and here is the key, the number of employees will have grown to at least 80 (or by 60% over the period). Multiply that by just 1000 qualifying business and you have begun to reduce unemployment meaningfully.
Many people might argue that we already have a fiscal deficit so we cannot afford to reduce taxes at all. Wrong. You cannot improve tax revenue over time by simply increasing taxes. You must first grow the economy thus producing increasing profits which are then subject to tax.
Please don’t be slow to claim some quick wins Minister Mboweni!
- Having initially qualified in the legal profession, John spent 30 years in the financial services industry, retiring in 2015 where he was the MD of the retail business of one of SA’s larger investment managers. John remains a non-executive director of a number of companies in the financial services sector.
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