How much more tax you would have to pay to fund a basic income grant in South Africa
The National Economic Development and Labour Council (Nedlac) says that the introduction of a Basic Income Grant (BIG) will make a significant difference in helping to alleviate poverty in South Africa, but its research shows that it will come at a significant cost to taxpayers.
Nedlac has published a new report looking at the feasibility of introducing a BIG in South Africa in the coming financial years. Nedlac is a social grouping that includes members from government, labour and the private sector.
The report shows that the implementation of a universal BIG at the level of the current special Covid-19 Social Relief of Distress Grant (R350 a month) could reduce the concentration of income of the top 10% of earners from 49.9% in 2019/2020 to just below 47.1% by 2024/2025.
The researchers also found that the BIG could impact macro-level economic growth directly, through increasing household productivity and employment, stimulating aggregate demand, affecting labour force participation, and influencing savings and taxation.
“Based on analysis of the multiplier effects of the BIG at the level of the current special Covid-19 Social Relief of Distress Grant, the grant has the potential to positively contribute around 0.5% to GDP growth over the forecast period through improved household demand as well increase employment by 4% by the end of the projection period,” it said.
However, there are significant questions around how this grant could be funded – with even the lowest BIG under consideration – R350 a month – requiring billions of rands in funding.
Based on various scenarios and target groups, the report shows that the cost of such a grant could be anywhere from R95 billion (targeting the unemployed at R350 a month) to R550 billion (universal grant at R1,270) a year, even in the most optimistic circumstances.
The researchers said that, if funded through personal income tax, a universal BIG at the level of the special Covid-19 Social Relief of Distress Grant (R350) would result in an approximate average increase in effective tax rates at 8.2%.
This figure escalates dramatically as the value of the BIG goes up. The report looked at the impact on personal income tax levels across three different grant levels.
| Grant level | Increase in effective tax rates |
|---|---|
| R350 (Social distress grant) | 8.2% |
| R840 (Lower-bound poverty line) | 19.8% |
| R1 268 (Upper-bound poverty line) | 30.0% |
While the lower and upper bound poverty line levels increased in 2021 (to R890 and R1,335), the report’s figures were based on the 2020 levels of R840 and R1,268, respectively.
The tables below outline how tax rates would be impacted across various income bands, in the researchers’ baseline growth scenario.
Tax impact of R350 grant
Tax impact of R840 grant
Tax impact of R1,268 grant
Wealth tax
The report concedes that tapping into personal income tax to fund a basic income grant in the short term may not be viable.
The researchers noted the economic effect of Covid-19 resulted in reduced revenue collection, and that PIT, Corporate Income Tax (CIT) and Value Added Tax (VAT) collections are expected to fall substantially over 2020/21.
Given the economic impact of Covid-19, the capacity to raise PIT, CIT and VAT tax rates is limited, they said.
However, National Treasury has signalled the possibility of an inheritance tax and a “solidarity tax”, which is regarded as a wealth tax, in a bid to raise additional finances for the fiscus.
The Davis Tax Commission (DAC) investigated the feasibility of a wealth tax. It was concluded that with the highly unequal levels of wealth in South Africa, a taxation system that ignores such inequalities in wealth, lacks legitimacy in the tax system. It further concluded, however, that the introduction of a wealth tax cannot be implemented in the short-term.
However, the committee said that work needed to be done before this could be used as a tool, including determining exactly which levels of taxable income should be regarded as wealthy.
“It is recommended that cost-benefit analysis, determination of an appropriate tax base and provision of comprehensive data on the pattern of wealth ownership in South Africa should be undertaken before a decision on BIG can be made,” Nedlac said.
This is to assess whether the tax revenue generated would exceed the administrative and economic burden on taxpayers and the South African Revenue Service (SARS).
“Given the significance of the cost of a universal BIG, alternative sources of taxation such as those mentioned above, should be assessed for viability in financing (partially or wholly) the implementation of a BIG.”
“However, such alternative sources of taxation may only be practically implemented over the medium term, therefore PIT, CIT and VAT remain the alternatives over the short-term if the implementation of a BIG takes place within the short-term.”
Reallocation options
Alternatively, the cost of implementing the BIG can be funded through the reallocation of public expenditure, Nedlac said.
“However, reallocating public expenditure comes with trade-offs. Spending on health, education and social development currently accounts for 56% of government expenditure, as per the 2020 Budget Statement.
“Furthermore, the implementation of NHI is a policy priority, which will result in additional demands on the fiscus.”
Ultimately, the introduction of a BIG will require trade-offs with other development programmes, including other social security reforms and tertiary education, the group said.
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