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Johannesburg – Raising taxes could have the opposite effect of raising tax revenue, and instead government should focus on tackling fruitless and wasteful expenditure and corruption, says an expert.
Speaking to Fin24 by phone on Tuesday, Ettiene Retief, chairperson of the National Tax and SARS Committee at SAIPA, shared insight on the impact of a tax hike as well as an expenditure cut, as called for by President Jacob Zuma.
Following the ratings downgrade by S&P to junk on Friday, the president called for tax cuts of R25bn and tax hikes by up to R15bn, Fin24 reported.
According to the National Budget review, released in February, government originally planned to reduce the expenditure ceiling by R10bn in 2017/18, and by a further R16bn in 2018/19. Government also projected a R28bn increase in revenue for 2017/18, through raising personal income tax and fuel levies. Revenue proposals for 2018/19 are R15bn.
When asked if tax hikes would lead to a revolt, Retief explained that a tax revolt starts with a dip in tax morality.
Currently there is negativity around the South African Revenue Service (SARS) and its commissioner Tom Moyane, as well as concerns about how revenue is being spent, which is contributing to a deterioration in tax morality. “If tax morality dips, taxpayers find ways to avoid paying tax and that is where tax revolt comes from,” he said.
Retief also said that before government can consider raising taxes, it needs to address other factors such as fruitless and wasteful expenditure, and corruption. “Taxpayers must be comfortable with what you are spending their money on… There are many factors that need to be addressed before asking taxpayers for more.”
Treasury estimates the revenue shortfall for 2017/18 to be R50.8bn, according to the mini-budget announced in October.
The lack of economic growth and growing unemployment, as well as the limited revenue collection will be made worse by people trying to avoid paying higher taxes, explained Retief.
He advised that government consider raising taxes in other areas, but not personal income tax. These include VAT, the carbon tax and the sugar tax. Government would likely consider a wealth tax, but Retief warned that this could push away the “goose that lays the golden egg”.
Treasury’s Director General Dondo Mogajane told Fin24 that details on tax measures would be introduced in February 2018.
“We will have to look at the whole package of cuts, including the new fiscal framework and the performance of the economy generally.” In the past few years Treasury has raised taxes as much as R20bn and R30bn, from a variety of tax categories, he said.
Cutting expenditure
Retief warned that government should not introduce cuts to things which are productive. Government’s options for cuts are limited as spend usually goes toward social relief and infrastructure. He promoted the eradication of fruitless and wasteful expenditure as government’s first port of call.
In turn, Mogajane said that government would not cut expenditure on items which have the potential to boost growth.
“There could be spending which is inefficient, there could be spending on programmes which are not performing and that do not have a great impact on the economy,” he said. These could be considered for cuts. “We will not be reckless in our approach to cutting,” he reiterated.
“We are going to be focused on those which will not have great harm or negatively impact the economy.”
In the mini-budget, Treasury indicated that further expenditure cuts or tax hikes could be “counter-productive”. Treasury also highlighted that further budget cuts would lead to “hard choices and difficult compromises”. “Sudden or deep additional cuts that are not well-targeted could put severe pressure on already stressed departmental budgets,” the document read.
Meanwhile, in a statement the South African Federation of Trade Unions (SAFTU) has criticised further tax hikes and expenditure cuts.
“There could not be a less radical and less transformative solution to the country’s economic crisis, than the massive public spending cuts and tax increases which he (Zuma) is demanding from the Treasury.”
“Bridging this ‘fiscal gap’ in the way Zuma is proposing will make the budget cuts already foreshadowed by Finance Minister Malusi Gigaba even bigger and make the tax increases even greater,” the federation said.
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