How to grow our narrow tax base?
The South African Institute of Tax Practitioners (SAIT) and Financial Planning Institute (FPI) budget breakfast, sponsored by African Bank and held at the Gallagher Convention Centre on 28 February, raised some interesting discussion points, not least the
And just because we have 13.7 million registered taxpayers, it doesn’t mean they’re all paying their taxes. Tax expert Professor Jackie Arendse said that South African taxpayers have been remarkably compliant, but one wonders what the actual percentage is?
Taxing a narrow tax base is hard and Pravin Gordhan has indicated he wants to focus on increasing the tax base in the next couple of years. Our high-income taxpayers are disproportionately overburdened, economist Mike Schussler said at the breakfast; He did, however, point out that ‘high income’ equates to R10000 a month or more in South Africa. (“These are the ‘rich bastards’,” he quipped.) This translates into a gross income of about R11500 before deduction income; next year, the estimate is that the median tax payer will earn about R12500 a month in taxable income.
Now here’s the crunch: there are only 2.8 million people registered and complying with tax laws who earn a taxable income of over R10000 (this was in the 2011 tax year). In essence, only one in 10 South Africans earn a taxable income of R10000 a month and they pay 97% of all personal income tax.
Schussler’s complaint is that we’re essentially turning into a modern European welfare state. “Put it this way. If you pay your taxes, you have paid for a house over the past 18 years or so, through SARS – and it’s not your own house,” he said. Roughly 60% to 65% of government spend is on social welfare, which includes housing, water, education and so on. In the meantime, we pay a lot of ever-higher taxes on roads, airport fees, harbours and infrastructure.
Integrate the informal and formal sectors
So how do we increase our tax base? COSATU’s Patrick Craven said there’s evidence to suggest that, when you give striking workers higher wages, they either join the ranks of taxpayers or they pay more tax. But it seems unlikely that all employers, who are also struggling in the present economic climate, will accede to this – for one thing, they argue that their businesses will simply cease to be profitable.
Bringing more people into the informal sector, then integrating the informal sector into the formal sector, should be a goal. We tend to think the informal sector is a subsistence-level safety net for the poor. It is not (or it is not just that), it equally refers to those larger almost legal businesses that simply fail to meet the legal requirements of registration, taxation and other formal standards. Many of these small business owners are capable of paying personal income tax, so what are the barriers to tax compliance here?
Government should ideally create incentives for the informal sector to want to participate in the formal economy. Ann Njeru of the Tax Justice Network Africa says that taxing the informal sector creates resistance but when governments become more accountable to taxpayers, in terms of providing essential services like water, sewerage systems and security, that resistance is significantly reduced. Would access to credit and training, as well as security of property make a difference? Undoubtedly.
In fact, researchers have found that ignoring informal sector activities tends to lower tax payment morale and increases the non-compliance risk in the formal sector. This comes down to a sense of ‘unfair taxation’ – in fact, tax advisor Professor Dilip Garach raised this point at the budget breakfast, stating tax morality is likely to become a problem soon. According to the Tax Justice Network Africa, researchers have also found that the greater the difference between the total cost of labour in the formal economy and after-tax earnings, the greater the incentive to work informally – to earn more money without paying tax.
We need to change our own ‘aid’ paradigm
We may shy away from the idea of taxing the informal economy because it would appear to be asking the poor to pay for what they plainly cannot afford. But this is forgetting that informal-sector workers are not all poor, nor do they wish to receive State hand-outs. We may be the most unequal country in the world but we should be cautious about ‘us and them’ thinking: productive taxpayers vs. the rest.
Zambia’s economist Dambisa Moyo has argued that the ‘aid’ paradigm in Africa needs to change. Billions of dollars didn’t lift countries out of poverty; On the contrary, poverty levels escalated and growth rates declined. It may seem counter-intuitive to ask the informal sector to participate in the economy on equal footing, but it is time we did so, because as soon as someone is ‘outside the State’ they feel alienated and have no motivation to participate in a country’s growth story.
In Tanzania, the revenue authority has introduced a Block Management System focusing on one geographical block at a time to identify potentially taxable firms and nurture a taxpaying culture. In Ghana, government is looking into ‘associational taxation’ – that is, negotiation with informal sector trade associations to help collect presumptive income taxes. What are South Africa’s creative solutions?
Yes, the budget reduces some of the red tape that holds small, medium and micro enterprises back, but Garach said we need to go a lot further. We need to create an enabling environment in which small business can play a vital role. Steven Friedman said social grants go some way towards kick-starting rural commercial activity, which is money well spent. But we need to ask our citizens – those who can afford it – to tell us what would induce them to pay taxes.
Editor’s thoughts:
SARS has done its utmost to bring previously unregistered taxpayers into the tax net, and it will rightly focus on arbitrage loopholes. We can increase the tax base by creating jobs, but our slow GDP growth isn’t encouraging. The South African Chamber of Commerce and Industry CEO, Neren Rau, said jobs are the answer, but we are far from convinced that government has the ability to deliver in this regard. As Patrick Craven said of government’s National Development Plan, “This is a hodgepodge of contradictory ideas, a plan for the status quo.” Therefore we need to help those entrepreneurs who are currently languishing without legitimacy in the informal sector. Countries with more regulation have been found to have a higher share of informal economic contributions, in total GDP terms, and we are probably one of the most bureaucratic countries is the world. It’s time for change. How do you think we can best bring the informal economy into the formal economy? Comment below or email fiona@fanews.co.za.
