High earners brace for 2010 budget shocks
Later this afternoon, 17 February 2010, Finance Minister Pravin Gordhan will present National Treasury’s 2010/11 budget to Parliament. “This year will be a real balancing act for National Treasury between the priorities of reducing the deficit and not choking off the economic recovery,” said Johann Els, senior economist at Old Mutual Investment Group SA (OMIGSA). Gordhan will have to work his magic despite plunging state revenues. Estimates are the South African Revenue Services will miss its revenue collection target by some R75bn this year.
Economists, market commentators and the financial media have a field day at budget time. In the days before the budget they speculate about possible changes and the likely impact of these changes on society… They’re usually slightly off the mark, so have to repeat the entire process in the days after the presentation. We thought it might be fun – with the presentation just moments away – to look at the content of some of the pre-budget press releases.
The well-to-do shoulder the tax burden
The first release we looked at was from PriceWaterhouseCooper SA (PWC). Their approach was to analyse the benefits to individual taxpayers of previous tax cuts. Kyle Mandy, Head of National Tax Technical at PricewaterhouseCoopers South Africa, set out to determine which taxpayers benefited most. Since the 2001/2 tax year tax relief is evident for all taxpayers. Using a subset of ‘imaginary’ taxpayers receiving inflation-linked increases Mandy determined that “low income groups had been the most obvious beneficiaries.” For a specific low income earner – earning around R167 000 per annum currently – the average effective tax rate has nearly halved from 16.4% for the 2001/2 tax year to 8.7% in 2009/10! “The taxpayer is paying less tax in monetary terms in the 2009/10 tax year than in the 2001/2 tax year, even though the remuneration package has increased by more than 67%.”
Someone earning a package of R670 000 per annum today would have seen their income tax burden decline from 30.7% to 24.6% over the same period. High income earners fare even worse. “The average effective tax rate of the high-income earner has moved to 29.5% in 2009/10, from 33.7% in 2001/2,” said Munday. The conclusion – that tax relief to low income earners comes at the expense of middle and high income earners. Is this surprising given the massive income disparity between rich and poor?
“While tax relief for low income earners is an admirable policy, South Africa’s tax regime is already massively redistributive,” noted Munday. The only way forward is for the country to embark on a massive job creation drive. Government’s public works programmes are simply not creating the calibre of income earner required to lift the country out of poverty. We need to reduce unemployment by creating high-paying employment rather than placing brooms and pick axes in workers hands for short periods of time.
Personal tax is top of mind
Our second release was from OMGISA – and we incorporated some of their comment in today’s opening paragraph. Their senior economist sketched the main different between tomorrow’s budget and the presentation given last year. In the 2009/10 budget ex-Finance Minister Trevor Manuel was able to ‘return’ R13.6bn to taxpayers. But as the budget deficit nears 8% of GDP there’s precious little room to manoeuvre. Els said lower income earners could still expect some tax relieve in 2010/11. This ‘relief’ will come by way of adjustments to tax brackets to compensate for ‘bracket creep’. [Bracket creep is a term used to describe how taxpayers are pushed into higher tax brackets – thereby incurring higher taxes – due to their annual wage hike.]
The picture is less rosy for wealthy individuals. First, there is a real possibility Gordhan will announce an increase in the top marginal rate of tax. If you think 40% is bad, spare a thought for your British counterparts who already pay away 50 pence in tax for every pound of income! The Minister could also bolster revenues by announcing increases to excise duties, the fuel levy, capital gains tax and perhaps even the introduction of an electricity tax. We’re hopeful the recently touted 1% payroll tax to fund the state broadcaster won’t even get a mention.
Post-2010 challenge
We’ll conclude with comment from audit firm KPMG, who threw the 2010 FIFA World Cup ™ into the mix. “Addressing the post-2010 infrastructure environment, physical and economic, is a key challenge that must be addressed in the 2010 budget vote!”
Editor’s thoughts: Although the experts expect VAT and corporate income tax to remain unchanged, we cannot help but wonder whether South Africa’s revenue salvation lies in hiking VAT. This tax is more ‘equal’ in that it taxes every individual relative to their monthly expenditure. Which would you prefer – an increase in the VAT rate from 14% to 15% - or a steep increase in the top marginal rate of personal income tax? Add your comments below, or send them to gareth@fanews.co.za
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