These taxes could finance South Africa’s proposed basic income grant

Policy think-tank the Institute of Economic Justice (IEJ) has published an analysis of a basic income grant for South Africa and how much it will cost taxpayers.

Depending on the grant’s goals and the number of people it is given to, the ultimate annual cost of the grant will vary greatly, it said.

The group based its calculations on the national poverty lines measured by Stats SA, chosen because of their direct linkage to poverty reduction.

The analysis shows that an 80% grant uptake would cost R192 billion a year at the food poverty line (FPL) of R585 a month. This would rise to R275 billion at the lower-bound poverty line (LBPL) of R840 a month and R415 billion at the upper-bound poverty line (UBPL) of R1,268 a month.

The tink tank also included informal sector workers because of the precarity and vulnerability which characterises this group.

The not formally employed (NFE) group includes the unemployed, those not in the labour force (for example, caregivers), and informal sector workers.

Funding 

The IEJ considered 19 financing options for a basic income grant, which it estimates would garner between R275 and R355 billion per annum.

These are not exhaustive, nor necessarily all to be implemented simultaneously, but illustrate different modalities for financing a universal income, it said.

Chief amongst these proposed taxes is:

• The introduction of a Social Security Tax – This tax is a ring-fenced tax on income, dedicated to financing an extension of social security. It aims to operate similarly to Unemployment Insurance Fund (UIF) contributions, and consideration should be given as to whether employers and workers each contribute 50% towards this tax.

• A Resource Rent Tax (RRT) – An RRT is an additional tax levied on the economic rent of extractive industries.

• A wealth tax – A wealth tax of 1% for the top 1% and a wealth tax rate of 3% for the top 0.1% is proposed. This will generate R59 billion in revenue.

• Luxury VAT – A luxury VAT is a sales tax placed on goods and services considered accessible only to the wealthiest. A good or service is defined as a luxury when at least 70% of its consumption is from the top 10% of income earners.

“Often, when tax increases are proposed, it is met with resistance followed by rebuttals around the high tax burden in South Africa,” the think tank said.

“It is important to recognise that those in the middle of the income distribution have experienced negative growth in earnings over time and that the top income percentile has disproportionately captured the income growth.”

However, legitimate concerns around the “middle-class squeeze” are often used to shield top earners, the IEJ said.

“The financing proposals, therefore, aim to remove or limit fiscal measures that currently disproportionately benefit the wealthy, thus promoting greater redistribution.”

Government’s proposals

The IEJ’s calculations and methodologies align with a green paper published by the Department of Social Development this week, which formally proposes introducing a basic income grant.

The department said it would be much easier to implement a reform that will require a significant adjustment to taxes, as it will be easier for government to ‘sell’ an increase in taxes on the working-age population with an increased transfer to that same population.

“Microsimulation for universal income support at the level of the food poverty line (R585) suggest that the financial cost will be approximately R200 billion and will require a 10-percentage point increase on income taxes.

“At face value, these amounts appear to be astronomically high and even impossible. For the majority of the population, depending on the transfer level, it is likely that the benefit received will be larger than their increase in taxes.

“The wealthiest deciles of the population will only see a slight reduction in income on average, and the impact of this may be reduced if phased in over a period of time.”

The green paper also proposes payments based on the national poverty lines, depending on what objectives government would like to achieve first:

• Reduce hunger – With this option, the grant value would have to be around the Food Poverty Line (FPL). As of the 2020 adjustments, this is R585 a month.
• Reduce poverty – This option would require the grant value to be pitched around the lower-bound poverty line (LBPL). As of the 2020 adjustments, this is R840 a month.
• Improve people’s standard of living –  In this case, the value should be significantly higher, but at least starting at the upper-bound poverty line (UBPL). As of the 2020 adjustments, this is R1,268 a month.

“Studies done on a decent standard of living suggests income of around R7,500 per person, per month. This is an aspirational value that government should strive to achieve through a mix of transfers, labour and economic policies,” the department said.

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