Income tax won't generate as much as a VAT hike - analyst

2017-02-23 17:28 - Lameez Omarjee

Johannesburg – The revenue generated by the new personal income tax bracket will still be lower than a 1% increase in VAT, said an analyst.

In a telephonic interview with Fin24, Professor Thabo Legwaila from the University of Johannesburg’s department of Mercantile Law shared his views on the new tax rates presented in the National Budget.

Over the past two years, the personal income tax for the highest income earners increased by five percentage points, up from 40%. He explained that the 45% tax will apply to individuals earning more than R1.5m. There are approximately 100 000 people in the country who earn this much money and would be able to pay the tax, explained Legwaila.

He added that personal income tax is favoured as VAT is perceived as regressive and would affect the poor the most and not the rich. However VAT is about money you spend and not earn. “If you had R1.5m to spend, 14% of that would be R210 000. The rich would still contribute a lot in VAT.”

“VAT is a big ticket item which would bring a lot through a small increase. When you want to raise money through an income tax, you must impose a high tax on the few that can carry the burden,” he added.

READ: Budget 2017: The wealthy will pay more

In South Africa the tax base is 14m people, only half of these people (7m) actually pay tax. Of these only 100 000 qualify to pay 45% tax on incomes above R1.5m.

“This means taxes must be increased by a huge percentage (5%) in order to meet financial objectives, which could be met by increasing VAT by half a percentage,” he said.  

These individuals only represent 1.4% of registered tax payers, said Stanlib’s chief economist, Kevin Lings. These individuals are projected to contribute 26.3% of total individual income tax for 2017/18.

ALSO READ: Gordhan: We did consider VAT hike

Gordhan introduced a below inflation adjustment to tax brackets. “This meant that the minister did not compensate the taxpayer with the negative effects of inflation,” said Lings. The hike, combined with the lack of adjustment in tax brackets means personal income taxes will contribute an additional R16.5bn to total tax revenue.

Other tax changes include an increase in the dividend withholding tax from 15% to 20%, this will provide an additional R6.8bn in tax revenue. The 30c/l increase on the fuel levy combined with the 9c/l rise in the Road Accident Fund will provide an additional R3.2bn. Excise duties on alcohol and tobacco should generate R1.3bn.

However, Lings explained that the bulk of the revenue will be derived from direct taxes in the form of personal income tax at 38.8% and company tax, at 17.6%.

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