Tax revolt may worsen if Gordhan targets Personal Income Tax to fill gaps

iStock_taxesAuthor: Jaco Leuvennink (News24).

Cape Town – When the government is looking for extra money, all signs point to personal income tax (PIT) because increasing VAT and Company Tax have political and investment implications that’s currently difficult to counter, says a tax expert that spent 14 years of his career developing tax legislation, especially closing loopholes, at the National Treasury.

Professor Keith Engel, an American with South African citizenship and currently chief executive of the South African Institute of Tax Practitioners (SAIT), said in an interview on a radio station (FM Classic) that higher income earners will be targeted. “Because the super rich is usually more tolerant…† (and) able to withstand tax hikes, the middle income earners may suffer the most. In an election year and with the rating agencies on our back, alternatives look highly unlikely.”

He added tongue in cheek: “One would of course have liked to spread the tax burden, especially to the masses who voted for this government.”

It is widely accepted that Finance Minister Pravin Gordhan will raise taxes in his Budget speech in Parliament today (Wednesday) to help prevent a downgrade of SAís debt and investment position to junk status. That is because the budget deficit and debt position will have to be reduced faster than the targets set in the mini budget in October 2015 to calm the rating agencies.

READ: Gordhanís Rubicon moment awaits

Johann Els, senior economist of Old Mutual, also believes ďmost of the deficit reduction will likely come from tax hikes since reducing governmentís expenditure ceiling significantly seems challenging right nowĒ.

Els says a likely 1% increase across the PIT-board with the exception of the lowest band, will raise an additional R10bn. ďThe most positive message the minister could send would be a VAT hike, although the probability of this is less than 50% given that weíre currently in an election cycle,” he says.

Figures on how many taxpayers SA has and who actually pay the bulk of taxes differ, but Paul Joubert, senior researcher of the Solidarity Research Institute, found in 2013 that 84% of taxes in South Africa is paid by those earning more than R200 000 a year. Another study found that about 5% of the workforce in SA (or less than 1.75% of the total population) pay more than half of all tax.

In the beginning of last year Engel already talked about the beginnings of a tax revolt in SA (during an interview with Alec Hogg of Biznews). And it could now worsen.

Engel said: “When youíre talking about a tax revolt, that usually begins in several places. People become more resistant to paying taxes. They complain (like the toll roads). The fight against taxes increases, as you say, when revenue is misused.† Unfortunately, you are in an environment where the economy is down, revenue is constrained and misused, and there is a growing hostility to taxation.

“Thatís when you start focusing on loophole closing because those are a small group of people rather than a large group of people. I think though that one of the big issues that should be discussed is that you canít talk about tax and expenditure in isolation of each other.

READ: Cosatu asks Gordhan to ban e-tolls, keep VAT steady

The real issue in South Africa is not a tax problem.† Itís an expenditure problem and weíre trying to simply do too much with too little resources.† Thatís my own personal view, but thatís also more of an economic view.

Meanwhile Wayne Duvenhage, chairperson of the Organisation Undoing Tax Abuse (Outa), titled “You cannot raise taxes while the bucket is leakingĒ, suggested the following seven actions to Gordhan:

1. Donít increase taxes this year. First fix the lethargic government, and clean up public administration.

2. Reduce the bloated size and the extravagant cost of the government by 30% over the next five years.

3. Seriously fight corruption, with a well-executed plan and no political meddling.

4. Privatise non-strategic state-owned assets. Government must get out of the business of business.

5. Create laws and policies which will stimulate investment and create jobs.

6. Improve education and healthcare. This includes better trained and paid teachers.

7. Promote transparency among all government departments and state owned entities.