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Cape Town - The hike in value added tax (VAT) from 14% to 15% poses the risk of eroding the spending power of poor and lower-income households, exacerbating poverty and increasing inequality, according to the Corporate Strategy and Industrial Development (CSID) research unit at Wits University.
VAT has contributed 24% to 27% of tax revenue in SA, and has been held constant at 14% since 1993.
It explained that VAT is levied irrespective of how much somebody earns, making it a regressive tax and in its view, taxes on goods (VAT and excise duty) hit the poor the hardest.
The lowest earning 10% of the population spends 13.8% of their disposable income on these taxes compared to 12.6% of the highest earning 10.1%.
The unit pointed out that the Davis Tax Committee admits that raising the VAT rate would increase inequality in the country.
Therefore, although the Wits unit admits that increased VAT is successful if considered solely from the perspective of revenue-raising, it cautions that the potential negative impact on the poor should not be ignored when other options are available.
"Despite wealth inequality in SA being extreme – the top 10% of South Africans hold at least 90% to 95% of its wealth, while the top 1% holds 50% or more of its wealth - taxation on wealth, or income from wealth held, is low," explains the unit.
This includes direct taxation on assets such as property, income from holding assets such as capital gains tax (CGT) and inheritance. CGT, for example, raised only R17bn in 2016/17, a mere 1.5% of tax revenue.
"Considering that large amounts of wealth were accumulated under apartheid, that this wealth is passed between generations, and that black earners have less assets to begin with and must support a higher number of dependents, (SA's) low taxes on wealth are indefensible and perpetuate inequality," states the unit.
Alternatives
Instead of uniformly raising VAT, the unit suggested that the list of zero-rated items (products upon which VAT is not charged) should be increased, especially goods bought by the poor such as bread, poultry, flour, candles, soap, basic medicines, pay-as-you-go airtime and education-related goods.
In the unit's view, alternatives to hiking VAT to close the revenue gap could have been repairing the administrative capacity of the SA Revenue Service (SARS), including its ability to tackle tax avoidance and evasion by corporates and the wealthy.
Another alternative could have been raising personal income tax (particularly on the highest earners); increasing corporate income tax; and instituting an annual net wealth tax.
More alternatives in its view could have been instituting a land tax, particularly on unused land, and increasing property taxes, particularly on non-residents and those owning multiple homes.
Increasing other taxes on property or income from property such as capital gains tax, estate duty and securities transaction tax could have been other alternatives. For example, levying capital gains tax in line with a top marginal tax bracket of 45% could raise an additional R4bn in the unit's view.
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