The burden on people paying income tax is becoming alarming.
Born free, taxed to death. Many SA taxpayers no doubt feel this is their fate. But they are probably unaware of just how burdened they really are by taxes in their various guises and a heavier burden almost certainly lying ahead.
A handful of registered taxpayers bear the main burden of direct taxation. Based on 2010 data, taxpayers earning over R400000/year constituted 8,8% of the then 6m registered taxpayers but paid 54,2% of total personal income tax (PIT), SA Revenue Service (Sars) commissioner Oupa Magashula told parliament’s standing committee on finance in May. The 43,3% of taxpayers with annual incomes under R120000 contributed 3,9% of PIT.
Paul Joubert, a senior researcher at the Solidarity Research Institute, narrows the data down further. Based on 2010/2011 tax data, he estimates about 2,1m people paid 92% of all PIT and 1,4m paid 82% of all PIT.
In government’s 2012/2013 fiscal year it aims to extract R286bn from the small personal tax base, 14,5% more than in 2011/2012 and 35,8% of total tax revenue. Tax collections from individuals to June 2012 indicate it will achieve its target but it is the next fiscal year and beyond that is raising concern among economists and tax experts.
National treasury’s medium-term budget forecast indicates it will be looking for R326bn from PIT in 2013/2014, up R40bn (14,7%) on this year’s estimate.
In 2014/2015 it will be looking to extract a further R49bn (15%) from income tax payers.
It will be a tall order, believes Rhodes University tax professor Matthew Lester. “GDP growth at 2,5% is not going to help much,” says Lester. “Increases in remuneration in recent years have been above inflation but that tailwind is starting to lose momentum,” he adds.
Treasury has already tapped heavily into another source of PIT over the past five years: fringe benefits. “All company fringe benefits to employees are by and large now taxed as if they were cash earnings,” says Ernie Lai King, tax executive at Edward Nathan Sonnenbergs.
Despite Sars being equipped with increasingly tough investigative powers, its ability to sustain its exceptional record of closing the tax net is also questioned. “The low-lying fruit has been taken,” says Lester. “Catching a few hundred tax evaders is great but it won’t bring in the type of money they are looking for.”
Echoing this view, economist Mike SchÃ¼ssler says: “The golden era of higher and higher tax collections is behind us.”
There are other ways to increase PIT revenue, including raising the 40% marginal tax rate. “It won’t help much,” says Lester. “There are too few taxpayers in the top income bracket.”
In its hunt for extra revenue government is unlikely to raise the corporate tax rate. Projected growth in corporate tax in the 2013/2014 and 2014/2015 fiscal years of 9,2% and 10,4% respectively suggests it has no plan to do so.
The other major source of tax revenue, Vat, is an “untouchable holy cow”, says Lester. “If [finance minister Pravin Gordhan] can get away without a personal tax rate increase next year it will be the result of masterful budgeting,” he adds. Taking a similar view, Lai King says: “I think a tax rate increase will happen.”
As ominously, Sanlam group economist Jac Laubscher says: “The tax rate is under upward pressure.” Down the line, he adds, the “big gorilla” is national health insurance. “Government is vague on how it proposes to fund it.”
A personal tax rate increase could be the last straw for many people in an economy where the average personal savings rate is already zero and unsecured consumer debt is rising at an alarmingly high 40% annual rate.
The tax burden also extends way beyond the obvious. Take Joe, who has an annual taxable income of R500000. Joe knows he pays 27% in income tax and 14% Vat on almost everything that he, his wife and son in matric buy. But he is probably unaware that at most these account for about two-thirds of the family’s total tax burden.
One of the biggest tax takes is on Joe’s transport bill. If he is an average Gauteng motorist he buys 140l of petrol a month, says SchÃ¼ssler. In a year it adds up to over R5000 in fuel tax and levies. Less obvious are taxes on the car Joe bought for R180000. Vat and ad valorem duty on the car come to over R26000 and a COÂ² emission tax adds another R4500.
As a smoker (20 a day) Joe contributes almost R3800/year in excise duty. Two dozen beers, three bottles of spirits and four bottles of wine bought each month take his family’s annual sin tax contribution to around R5500. Owning a modest house, Joe will also cough up about R9000/year in municipal taxes and at the average electricity usage rate for SA households, R460/year in electricity levies to the state.
Far more onerous are school fees. Joe’s son at King Edward II, a government school, will cost just short of R28000 in fees in 2012. Arguably school fees are not a tax. But if Joe lived in the UK or Australia, for example, he would be paying no school fees. He would also be paying a lower tax rate – 22,3% in the UK and 18,9% in Australia – and have the benefit of a free state health service.
Joe’s income is also burdened by many other taxes ranging from a 45% duty on clothes imported from the East to a tax on plastic bags. Throw in TV and car licences and a 15% dividend tax on a R100000 unit trust investment and he is parting with at least 43% (R213000) of his income in tax in its various forms. The percentage is probably far higher. Toll road fees, airport taxes, a bewildering array of import duties and once free government services now paid for are among those adding to the tax bill. The need for costly private home security is another form of tax, many would argue.
Against this background, Lai King takes strong issue with government. While praising Sars for its efficient tax collection, he stresses this is only one side of the equation. “There must also be vigour on the other [spending] side,” says Lai King. “Government is not spending our money very well. There is huge wastage and billions of rand go unaccounted for.”
Just how much money goes astray is indicated by the Special Investigating Unit’s estimate that government loses R30bn/year through “financial leakage”. More and more taxpayers are becoming “cheesed off” by the extravagance and inefficiency they see in government, says SchÃ¼ssler. In the post-1994 era, he adds, taxpayers felt a strong moral obligation to pay tax to help build a new SA. “Most [taxpayers] still feel a moral obligation to pay but there are signs some are beginning to see things differently,” he says.
One sign, SchÃ¼ssler says, is the nonpayment of municipal rates and taxes. “Amounts outstanding to municipalities for more than 90 days now total R50bn,” he says. Gauteng’s controversial toll road fees provide another example of a mini tax revolt, with many motorists having said they would flatly refuse to pay.
“There is a big problem,” says Lai King. There is a limit to how much tax can be extracted from the small number of taxpayers who pay the bulk of income tax, he warns.
Schüssler fears a trend growing in which taxpayers no longer see nonpayment of tax as immoral. “It won’t happen overnight,” he says. “But there is a real danger that in 10 years’ time the tax collection rate will not be as high as it is today.”