Category Tax

budget speech requests

02 February 2006 David Clegg

Most tips for Trevor at Budget time involve the tippers favourite wish list.

But in the fiscal and economic domain (the revenue side of the budget), action on many of the tips is constrained by practicality or reality, and what I propose in this article is look at a few tips mentioned in this and prior years, in this context. Having said that, I will finish with a couple of expenditure side wishes of my own!

A flat tax?
It sounds delightful let everybody pay the same, low, rate. We will all be overjoyed at how low the rate is and will pay it happily. And, to boot, the system will be much simpler.

The flat tax idea has been around for years. I understand that a few Eastern European countries have introduced something similar, and a strong lobby exists in the United States (dating back from the Reagan years) for it to be introduced there.

In South Africa, it was examined by the Chamber of Commerces National Taxation Committee in the late 80s, which concluded that a rate somewhere near 20% would have covered the budgeted expenditure for the prior years budget. In those days, the top marginal rate of tax was around 45% (at an income of R60 000) and it looked fairly attractive.

But the bugbear then is the bugbear now 20% might look fine to the top slice of the population, but to the middle, where most taxpayers (read taxpaying voters) are concentrated, it is no better than what they have and could be worse. (Remember, a person earning R300 000 today pays an average (flat) rate of only 25% and at R180 000 income, 20%).

Moreover, a flat tax implies just that no differentiation between taxpayers according to their means to pay. And in South Africa as in any other country with a large gini coefficient - there are an awful lot without the means to pay, which means that you must exclude them either by way of a tax free threshold (what happened to the flat rate?), or by way of graduated tax rebates (at the moment we have just two for under 65s and over 65s which effectively creates two different thresholds).

But if we are to start excluding large portions of the population, all we are really doing is modifying our existing progressive rate system to a smaller number of brackets - as was done in the US and UK during the Reagan and Thatcher years.

And would the system be simpler? If, by simpler, one is talking about the number of tax brackets applicable to individuals, then I guess the answer is yes. But progressive rates are hardly a complexity for computerised PAYE software or someone with grade 9 maths (or shouldnt be).

The real complexities in the South African individual tax system come from the socio-economic engineering principles applied by Treasury to, for example, medical expense deductions and subsidisations, fringe benefit taxation (of which I approve) and so on. And these are unlikely to go away in a hurry, flat rate or no flat rate.

We must also remember that a progressive rate system is (or at least was) widely applauded as recognising the moral imperative that in a society of income inequality and social need, those who are better off should pay relatively more to the maintenance of civilisation than the poor. A principle with which I wholeheartedly agree.

So, do I think a flat tax is on the cards? No. But I would not be surprised to see a further reduction in the number of tax brackets. Will the amount at which the top rate kicks in (currently R300 000) be further extended? I think not, given that inflation is low and that the top bracket has moved very significantly in the past five years.

Do I think that the top marginal rate will come down? It should there is already an uneasy imbalance between the corporate rate of tax including tax on distributed profits 36,9% - and the top marginal rate for individuals of 40% (note that small companies now enjoy progressive rates of tax topping out at 36,9%).

Economic theory suggests these top rates should align, so as to remove any incentive to operate in incorporated or unincorporated form dependent purely upon the tax rate to be enjoyed. There was a time when these rates were wildly out of line but they were brought back into alignment some years ago and were subsequently allowed to start drifting.

Should the company rate of tax reduce?
Well, firstly, refer to my remarks above on the alignment of individual and corporate rates. Secondly, it seems reasonably clear that South Africas normal corporate tax rate is competitive in world terms and is not a disincentive in any way to foreign direct investment.

Of course, any corporate manager aiming to maximise shareholder value would prefer lower rates and, where the law allows, will look to manage them down which as we saw in late 2004, makes secondary tax on companies (STC) (ie: the tax on distributed earnings) vulnerable if the law imposing it is allowed to fray at the edges.

Should STC go? Well, it is a complication in the system which I would happily do without but if its originally proclaimed purpose that is to encourage companies to retain funds for reinvestment, rather than to distribute to shareholders (who presumably will put them under the bed and do nothing with them?) - still exists, then it presumably is still doing a reasonable job.

If, on the other hand, like most taxes, it is now just a part of the moneymaking machine, then my sense is it will be better to do away with it and raise the base corporate rate by sufficient to compensate. Revenue collection statistics suggest that this might result in a corporate rate of about 33%. But maybe, given the surpluses available and that it actually generates very little (around R7-billion) it can just go!

Do away with exchange control
This item of the wish list must always be read in the context of the person making the wish a portfolio manager, an individual, an economist or what have you.

Most people apparently think the wish refers to the restriction on emigrants blocked Rands. But they do not yet seem to have realised that since 2004 and subject to a 10% levy, an emigrant (new or old) can remove his or her entire capital from the country and I do not think that such a levy would discourage anyone who is seriously concerned about this countrys economic future, from removing their loot in a flash.

But the plain fact is that this is not happening, which suggests that economic confidence in South Africa is high and will not be altered one iota by such a change (assuming everyone understands that exchange control for emigrants is effectively dead).

But there are other forms of exchange control which affect incoming corporate fixed investment - restrictions on the terms and conditions of parent company loans, local borrowing by subsidiaries of foreign parents, restrictions on the distribution of dividends and so on.

There are also restrictions on South African residents (other than emigrants) of which the only significant one (in my view) is the R750 000 permitted for foreign investment which has remained unchanged for some years. My own view is that for most individuals this is really not an issue, but given the impression created by comment in the South African press that there has hardly been any relaxation of exchange control restrictions in the past ten years, it may be fighting well above its weight.

My own instinct is to have done with the remaining controls of all kinds, save only for a measure which enables inflows and outflows to be scheduled over a period, so as not to create unlooked for blips in supply and demand for the Rand.

But is that likely to happen? The Minister is on record as saying that no further relaxations (of part or all of the rules he did not elaborate) were on the cards until the amnesty process had worked its way through. That process is, I believe, about to be completed and by now presumably the Minister has a good grasp of the numbers. On that basis, I would not be surprised to see a wholesale removal of the remaining controls in this budget but I am certainly not betting on it!

Lets simplify the system
How? The reality is that almost irrespective of the rate of tax and any incentive to duck and dive to pay less, a modern economy with its infinite variety of familial, commercial, industrial and financial transactions, requires an extremely complicated system to regulate the manner in which tax will be levied i.e. to define the taxable amount.

It would be lovely to think that the tax rate could be applied to every income amount without exception no allowances, deductions or what have you but that, with the greatest respect, is pie in the sky. It would replace a tax on profits with a tax on gross receipts and that clearly for somebody running a business on low profit margins is clearly a non-starter.

Drop the VAT rate
Possible but unlikely, I think. While there are surpluses available today which might (I have not looked closely at the numbers) cover the loss from a half percent drop in the rate of VAT, it is dangerous to rely on those surpluses continuing, and to put the rate back up again would not be easy from a political point of view.

What of my own wishes?
Paradoxically, while I think rates of tax could be aligned better, I do not think that they are too high overall and rather than argue for cuts, I would far rather:

Home Affairs sorted out its mess with delivery, and introduced and properly publicised a non-xenophobic policy of encouraging skilled people of any origin to work in South Africa;

SARS to dispel the growing perception amongst professionals that assessments are sometimes raised unnecessarily, putting pressure on busy corporations to negotiate a small payment rather than fight for their rights;

Politicians and public office-bearers of all stripes to stop playing the race card when criticised or criticising (I know that has nothing to do with the budget but I thought I would get it in); and

Municipalities (in particular) to hire the skills needed to spend their budgets and most importantly for well trained and committed police, teachers and nurses to be paid appropriately, and for the underperforming and uncommitted to be left behind.

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