Tax pegging ratio of 25% tax to GDP = A Small State | by Donna Andrews

by Jan 21, 2013Magazine

amandla-28-taxRevenue from personal income tax is part of how governments are able to fund the type of society they imagine. In the case of South Africa, the government presents a vision of a more equal society, striving to lessen inequality and right the wrongs of the past. For this vision to become a reality the government requires a radical tax and redistributive policy.

To tax South Africa’s corporations, wealthy elite, small middle class as well as workers earning more than about R64,000 per year, pay taxes on personal income, profits and wealth. Taxes keep the state going. Taxes also finance social grants, public health and education. Everyone is a taxpayer. VAT – value-added tax — of 14% is added to the price of most goods and services in all formally registered shops. Indeed, an informal shop that gets its merchandise from a big supermarket, also buys that merchandise at prices that include VAT, before selling to its customers. A 14% VAT means that something that would cost R100 without instead costs R114. The shop should forward the extra R14 in this example to the SA Revenue Service.

Each year we await the budget speech to hear where resources are going to be directed. Many progressive organisations lobby for increased spending on health, education and other areas, but they seem to neglect to review the governments’ supposedly progressive tax policy. The higher an individual’s personal income, the higher the percentage of tax paid on it. But why is government pursuing a strategy of constantly lowering the tax rate? Are huge tax cuts not a direct contradiction of progressive taxation and a radical tax and redistributive policy?

Progressive taxation means that individuals with higher incomes pay a larger percentage of their income in tax than those with small incomes. The idea is to tax people in line with their ability to pay. The part of a taxable income that exceeds R617,000 per year (called the ‘sixth tax bracket’) is currently taxed at the top rate of 40%. The part of the taxable income that exceeds R63,556 per year – and lies over the so-called ‘first tax bracket’ is taxed at the lower rate of 18 %. Between these two brackets there are four other levels, with tax rates ranging from 25 to 38 percent.

Making sense of South Africa’s 25% of GDP Tax Pegging rule

As early as 1993, South Africa’s ratio of tax revenue to GDP was set at 25%. In 1996, with a firm shift from RDP — the Reconstruction and Development Plan — to GEAR — the Growth, Employment and Redistribution — the pegging of tax to GDP at 25% was further institutionalised. GEAR promised ‘considerable scope to effect further reductions in the rates of personal and corporate taxation, while maintaining a ratio of tax to GDP of about 25 percent.’

This policy was recently confirmed in February 2012 by Pravin Gordhan when he said that ‘key features of the budget framework include … Tax revenue stabilising at about one-quarter [25%] of GDP.’

‘Taxation and the struggle against inequality and poverty’, a recent report by Dick Forslund, published by the Alternative Information and Development Centre (AIDC), discusses the impact of the South African government’s self-imposed tax limit.

Government has consciously chosen to give rebates and huge tax cuts to the well-off, the super-rich and the corporations they own. Potential resources to invest in social spending to redress apartheid inequality have been forfeited.

This sheds a different light on the frequent claim that we have the right to certain basic living conditions under our progressive constitution, on condition that the funds are available. The tax-pegging policy rule ‘blocks a fundamental and irreversible shift of wealth and power to the working people and their families’, Forslund argues, using a phrase from an old British Labour Party election manifesto. Concretely it means not spending enough on education, housing, social services and health in rural and urban areas where working people and unemployed live.

Funding the National Health Insurance

The AIDC report argues that one way to finance the National Health Insurance scheme, which aims to more than double the size and strength of public health care sector between 2010 and 2025, is to simply increasing the tax ratio to 29.5% of GDP. This level was suggested by the so called MERG economic policy project supported by Cosatu in 1993. This would increase tax revenue in 2012/2013 by approximately R144 billion — equivalent to more than the whole public health service budget today. This would facilitate the first year of implementation of the NHI.

What plausible reasons could the government have for abstaining from an appropriate level of taxation, to get much-needed resources? To peg tax revenue at 25% of GDP is just as important policy rule as inflation targeting. It signals a small state which will not be able to deliver in any meaningful way on its developmental goals, much less its promises of ‘a better life for all’.

The argument put forward by Forslund draws on earlier ones by Marias, Bond and Terreblanche which articulate the nature of the transition and the behind-the-scenes negotiations over the end of formal apartheid. These facilitated binding neoliberal policies, continuing to ‘protect the affluent minority from the threat of the redistribution of wealth and income’.

Increasing the size of the revenue pie or feeding more from a smaller pie?

The 25% tax to GDP ratio was the tax level during the latter days of apartheid – when the state mainly served the needs and privileges of the white minority, some 10% of the population.

This policy cannot go unchallenged. Challenging the tax pegging ratio is a means to generate adequate funds to address high unemployment, poor quality services, and provide decent housing, education and health for all in South Africa.

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