Time to stop the tax cuts

by Nov 26, 2012All Articles

‘There is no money!’ This is the standard response to the demands with which the government continues to be bombarded by people whose basic needs have still not been met after nearly 20 years of post-apartheid rule. People in South Africa are angry and impatient in large numbers.

In more recent years, the government’s plea of poverty sits uneasily alongside the problem of all spheres of government being unable to spend their allotted capital expenditures.Neither can the problem of corruption be ignored, but the focus of this piece is the government’s alleged poverty. It remains the main reason offered for why so many South Africans still live amid levels of public service and in conditions little changed from the bad days of apartheid. The government effectively abandoned its own Reconstruction and Development Programme (RDP) in 1996 because it was allegedly too expensive, to ‘the tax payers’. A couple of years later the government started to shift the whole political setting of the personal income tax.

The same sentiment, that a minority is paying too high taxes,was expressed in the media before Finance Minister Pravin Gordhan’s Mid Term Budget Policy Speech (MTBPS). Commentators argue that there is a pressure on the government, from objective circumstances so to speak, to increase the tax revenue with higher tax rates and that this is a bad idea. There indeed such a pressure.No doubt, the same argument will be repeated in February before next years’ budget.

I shall instead argue that we today see the human, political and economic cost in South Africa of a ‘small state’ policy. From the point of view of the poor and working class majority, who benefited little from the apartheid ‘welfare state’ to put it mildly, budget data show that this policy has continuity back to before 1994. The new 2012 edition of Tax Statistics was published three days before the MTBPS. Just like previous editions it shows the personal income tax (PIT) has been cut dramatically.

Besidesbeing a recipe for social rupture, it is simply not rational to meet growing income inequality with lighter and lighter tax pressure on the small middle class and the rich. Politically and morally, this cannot possibly be what the liberation struggle was about. Current events shows that it should stop, but if not for other reasons, so for the reason of financing the national health insurance (NHI) reform. As for the popular ‘narrow tax base’ argument, it is not valid in the South African situation. The more unequal is the income distribution in a country, the more irrelevant is the reference to its narrow tax base when arguing against higher taxes.That one tenth of the income earners are paying more than half of the personal income tax is a nice sound-bite in radio program. The thing is though that they should do that.They earn more than half of all income.

South Africa, like most countries, claims that its personal income tax (PIT) enshrines the principles of progressive taxation. Progressivetaxation means that individuals with higher income pay a larger share of their income in tax than those with small incomes.The ideais to tax people after their ability to pay. The tax cuts have made the SA personal income tax less and less progressive.

The primary purpose of progressive taxation in South Africa ought to be the rectification of South Africa’s growing inequality. The ‘wages’ share of national income (Gross Domestic Product) fell from 55% in 1998 to below 50% today.A telling example today is thatthe wage share of value added by platinum mining to GDP fell from over 60% in 1996 to below 30%, where the wage share stays today. The enormous salaries of senior managers, including that of CEO’s are masking the full extent of this growing inequality. They are deemed to be ‘wages’, for statistical purposes, thereby exaggerating labours’ share while minimising the share going to profit.Consistent with profits constantly beating wages in its share of national wealth, tax policy has been to tax corporate profits less and less.

The strategy since the end of the 1990’s has been a strategy of tax cuts balanced by an extensive growth of tax revenue. More and more taxpayers, individuals and companies, have been brought by the SARS into the formal economy and the tax system. This has been combined with steadily decreasing personal and corporate income tax rates and recurring tax amnesties. The two-legged strategy has not shifted growth and development in South Africa from being elitist, with enormous inequality not only between rich and poor but even within the richest 20% of the population.

Given the problem of providing good public sector services for all, and the permanent health, housing and education crises, to name but a few, why has the government pursued a strategy of lower and lower tax rates? Neoliberal economics that trumped the RDP is undoubtedly a factor. But neoliberal economics also shaped the negotiated settlement that led to the 1994 election. In a complex of ways, this economics also lies behind the government’s self-imposed policy of tax cutting.

But this is not all. A rule that total tax revenue – taxes on personal as well as corporate incomes; tax revenue from VAT, fuel taxes and other taxes – should stay at about 25 per cent of gross domestic product (GDP) obviously dictates the tax policy. This rule limits the size of the public sector and the scope for government intervention. The rule leads to ‘small government’.

The 25% tax-pegging policy repeatedly obliges the government to grant huge tax reliefs. If the government didn’t do this, tax revenue would automatically exceed 25 % of GDP after a short period. This would happen even if tax rates on individuals and firms were kept at a constant percentage and the personal income tax brackets were adjusted by the rate of inflation. A significant increase in the number of tax payers along with even a modest growth in GDP per person can have only one unavoidable outcome: the breeching of the 25% limit.

The tax-pegging rule surfaced publically for the first time in the 1996 GEAR document that spelled out that ‘maintaining a ratio of tax to GDP of about 25 per cent’ is a goal for fiscal policy. This was reaffirmed by theFinance Minister in his February 2012 Budget speech. In his words, ‘key features of the budget framework include … tax revenue stabilising at about one-quarter of GDP’. The Budget Review states an exact 25.0 per cent ratio for 2012/13, and it is at this level that taxes are budgeted forward to 2015.

Without this policy, the government would have had a vast increase in revenue. All that was required was for the government to refrain from making large tax cuts every year. These cuts have not been’fiscal drag relief’. They have not adjusted tax brackets upwards little by little at the rate of inflation, in order to avoid that the same real wage is taxed a little harder.

No, since 2000, tax bracket adjustments have greatly exceeded inflation. The same yearly income in real terms or ‘life style’ –R289,000 in taxable income 2010/11 – was, for instance, taxed at 33.8 per cent in 1994/95 but at only 18.2 per cent in 2010/11 (Table 3 in the full tax report). Even when comparing the 2012 edition of Tax Statistics with the 2011 edition, we find a 0.1 to 0.4 percentage point decrease in the tax rate over one year alone. Together with lower and lower corporate income tax (CIT), this is what keeps the tax revenue ratio to GDP at 25 per cent since 1989. The only exception during this whole period is four years around the Polokwane political turmoil and the crisis 2008-2009.

If the government had stuck strictly to compensating taxpayers for ‘fiscal drag’ or ‘bracket creep’ and not lowered tax rates, more than R125 billion in personal income tax could have been collected in 2010 alone.

Again: inequality in a rich country like South Africa unavoidably creates an exceedingly rich, though ‘narrow’, tax base. If, for argument sake, the entire national income went to one person only, a progressive tax system would tax him at a rate of some 99.99 per cent. Although he would be ‘such a narrow tax base’ he would still bevery well off.

The Department of Health wants a more than double as strong public health sector. Apart from the fact that the NHI cannot be funded without breaking the 25% limit, all that is required for its financing – or any number of projects that would materially transform the lives of most South Africans – is, indeed, the government’s political will to bring ‘progressive’ back to its tax regime.

It is hard to envision this government increasing the taxes for the rich. But already to do nothing, to be conservative, to refrain from neoliberal tax activism, already to stop to meet successes in SARS’ tax collection with new tax cuts would soon make a significant difference. Those who pay personal income tax would notice nothing of such a change. For the government it would however mean to abandon its 25% tax ceiling and let things have its course.90 percent of the population are heavy users of today’s impoverished public sector; users of public health, education and public transport where this exists. To them it would make all the difference.

Dick Forslund is an economist and researcher at Alternative Information and Economic Centre in Cape Town. The report ‘Taxation and the struggle against inequality and poverty’ is available on the Amandla! Website www.amandla.org.za

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