The Financial and Fiscal Commission (FFC) has published its submission on the 2022 budget, with the group warning that South Africa is facing a growing tax problem as a result of the Covid-19 pandemic.
The FFC is a constitutional body that advises parliament and government on state fiscal matters.
In its analysis of tax payments in South Africa, the FFC said that government has become increasingly dependant on personal income tax (PIT) and VAT for public revenue generation -which has made revenue incredibly vulnerable to disruptive events like Covid-19.
The commission said that generation is especially vulnerable due to the impact that the pandemic has had on household income and consumption behaviour.
Over the past decade, South Africa’s fiscus has become more dependent on labour and household income, as well as activities in consumption, it said.
However, the Covid-19-induced lockdown left millions of people unemployed, unable to pay income tax and unable to spend.
“In terms of consumption, although the government provided the special Covid-19 living allowance grant, R350 per person per month, its impact is negligible when compared to individual loss of income and reduced spending power,” it said.
This lost revenue is not being made up elsewhere – especially not in corporate tax, which has receded over the last decade to 15.6% of revenue generated.
In effect, this means that revenue generation is becoming increasingly dependent on a shrinking tax base, and that the PIT-concentrated tax base will absorb the full impact of the lost income, the FFC said.
The commission said that government should also take cognisance of its fiscal sustainability when overspending to smooth over people’s consumption pattern.
To avoid adding pressure on the economy suffering under Covid-19, the government has withdrawn its initial proposal to increase taxes in the 2021 budget.
Instead, tax relief was issued through the higher-than inflation adjustment in the tax brackets for PIT at 5%.
“It is anticipated that the tax relief created will encourage spending and stimulate economic growth with some returns on VAT so that government can meet its expenditure needs,” the FFC said.
The annual change between the tax proposals is generally implemented by adjusting the income tax brackets to account for inflation.
“This provides valuable insight into whether the tax policy is consistent and progressive in structure,” the FFC said.
“The data shows three interesting facts about the revenue proposal of 2021 relative to the 2020 proposal, notwithstanding Covid-19.”
- Taxpayers in the older age cohorts have a higher tax threshold than those below the age of 65 and only start paying taxes on an income over R120,000 per annum.
- Older taxpayers receive more tax relief for the same income relative to taxpayers under the age of 65, although this difference narrows as income rises.
- As a general trend, tax relief decreases as income rises.
This suggests that the new tax proposal is progressive, as higher-income earners receive less tax relief and pay more taxes.
However, the lack of uniformity and consistency of tax relief could be a matter of concern, the FFC said.
“In particular, income earners in the highest income category, who earn at least R2 million per annum, receive more tax relief than those who earn less than R2 million, resulting in a regressive or counter-progressive trend between the two income groups,” it said.
“Therefore, to maintain structural progressivity, consistency and – ultimately – the overall effectiveness of the tax system, it is advisable for the tax relief system to follow a more uniform approach with a consistent trend in the revenue proposals’ tax relief.”