A notable portion of the post budget narrative has centred a new income tax bracket at 45% for those earning R1.5mn or more – “the wealth tax”. Unfortunately this debate quickly degenerates into often unconstructive political haggling. This conversation is also a major distraction, a red herring, from a far more concerning trend in South Africa’s budgetary process that has a clearly negative impact on everyday South Africans. For the sake of this article, let us forget about the 45% tax bracket, not only because it’s a political hot potato but because it’s only set to raise an additional R4bn in revenue, which is a puny 0.1% of SA’s GDP. What is far more critical is the pervasive tax assault on the broader economy that is becoming entrenched with each and every budget that we allow to pass us buy as a “good job Pravin under tough conditions” budget. The broad-based expansion of South Africa’s tax regime allows an inefficient government to expand its belt another notch wider, entrench itself as the most powerful organ in the country and the best get-rich-quick-scheme for young South African’s because economic policy is too cumbersome to encourage new entrepreneurs to start private businesses. This trend is severely negatively impacting all South Africans but particularly the poor who continue to look to the government for economic leadership and direction but who continue to get sold political stories.
Incremental change in the 2017/2018 tax burden is pretty fairly shared, contrary to the popular narrative
The “wealth tax” will only result in R4bn new revenue in the 2017/2018 fiscal year, approximately 16% of the new revenue from this years tax changes. The balance of the R16bn boost to the state coffers from personal income tax comes from ordinary income earners through one of the stealthier versions of state extraction, bracket creep. Bracket creep amounts to R12bn, which is a far more substantial 43% of the new revenue from the 2017/2018 tax changes, the biggest item on the list by far!
While government usually adjusts it’s spending levels religiously higher each year by at least inflation it fails to adjust income tax brackets to the same degree. This allows SARS, the Treasury and broader government to glean extra funds from numerous unsuspecting tax payers.
In 2017 tax brackets were adjusted 1% higher, which clearly doesn’t compensate for inflation. Many everyday South African’s who might only receive a inflation (approximately 6%) increase in salary if they are lucky, which should allow them to keep pace with increase in the cost of living, run the risk of jumping into a higher tax bracket and ending up worse off than the year before. Unless you are earning below R75750 per annum and are tax exempt, this policy impacts even the lowest income tax payers - not just the rich.
Some might think that it’s the government’s primary object to look out for those who have nothing – the destitute and poor. With narrow unemployment in the region 26% anyone earning a salary might be classified as “privileged” in South Africa. Maybe certain commentators will make the argument that each and every tax payer, no matter the tax bracket, has a civic duty to pay more income tax?
Government looks after itself, not the poor
Let’s look at the destitute and poor - those that are reliant on social grants for the income to see how they have fared from the National Treasury budgetary process. Social grant’s increased approximately 6.2% from 2016/2017 to 2017/2018, which should just about cover the rate of inflation, which is currently at 6.6% but is expected to decline through 2017. Unfortunately the poor spend a disproportionate amount of their income on food and fuel, which have risen at much higher rates of inflation. Additionally, these products will both experience tax increases through the governments incoming sugar and fuel tax hikes, creating an extra burden for the poor.
Ignoring the composition of shopping baskets and taking a look back through time we find that social grants have barely increased in-line with inflation since the financial crisis. By my calculations social grants increased by 4.8% annualised on av
erage over the last 8 years, while inflation increased by 4.9% annualised over this period, which suggests that social grants aren’t keeping pace with headline CPI, which itself doesn’t really match lower income household living expenses.
A line-item that continues to grow with vigour is government salaries. Not just the aggregate wage bill but remuneration per employee has grown approximately 8.2% annualised over the last 8 years, far in excess of both inflation and social grant increases over that time.
Don’t believe the government sales pitch
Government always puts together it’s policies with the most noble of intentions and it will sell those policies to the public in a digestible manner. Budget 2017 was sold to the public by making an example of richer South African’s because it is easy to target the upper income earners in a country with such high inequality. But the fact is that the wealth tax doesn’t even raise a significant amount of funds for the state coffers. Much greater government revenue for the 2017/2018 will be raised through the stealthy use of bracket creep, another increase in the fuel levy and taxes on tobacco and alcohol. These taxes have a very real impact on everyday normal South African’s who are merely trying to earn and income, get to work and have a beer on the weekend - not the rich.
Government is crowding out the rest of the economy
Summing together tax revenue from the various sources and comparing it to the size of the economy creates quite a clear picture. Government is extracting more revenue than it ever has relative to the size of the economy. This simply cannot continue indefinitely. Tax authorities will admit that they are already walking the line towards higher levels of tax evasion. Tax levels are onerous and will start to hinder revenue collection as more and more people consult lawyers and accountants to protect their shrinking disposable income. What is probably much more concerning than rising tax evasion is the negative feedback loop from higher tax revenues into economic growth.
The graph above suggests that the size of government is far too big! Of course the ratio of revenue to GDP is higher in some other countries around the world but those countries didn’t necessarily grow wealthy under those conditions and governments in those countries generally provide their citizens, rich and poor, with a much higher quality of service delivery. The SA government is extracting an inordinate amount of capital out from the economy, not producing satisfactory basic infrastructure (electricity, roads and education) but yet it expects businesses to invest, drive the economy forward and produce jobs. Unfortunately this isn’t going to work. Businesses need a clear policy signal from the government that the economic reins are being passed from the public sector towards the private sector. The only way to do this is through less government not more - less spending, less SOE’s, less government departments, less regulation and less tax on all South African’s rich and poor.
Sound Money 