Will the personal tax holiday end in 2009

Raising personal taxes in an election year is political suicide – or is it. This logic holds in a myriad of Western democracies; but falls flat in a country where the ruling party runs its campaign on a ‘pro-poor’ ticket. As long as the move to higher personal income tax is steeped in ‘Robin Hood’ symbolism – by promising to punish the wealthy and reward the poor – Treasury can raise the personal income tax rate for top earners through the roof without suffering on the popularity front. In reality government can increase the tax load on individual taxpayers by much subtler means.

At a Budget Trends Review held in Johannesburg yesterday, Ernst & Young warned that the tax holiday enjoyed by personal taxpayers since 2003 could be over. The main reason for this change is that finance minister Trevor Manuel won’t be able to rely on strong domestic GDP growth, rising employment and soaring corporate profits to fill government’s coffers in the 2009/2010 tax year. As South Africa’s finance guru awakes to the full impact of the global financial contagion his focus will shift from creative ways to ‘give back’ to the middle and low income groups (by way of tax relief) to compensating for the likely contraction in corporate revenues. Where will he go to plug this gap?

Limited options to bolster revenues through recession

To answer this question we must consider the contribution of each taxation category in the 2008/2009 tax year. Over that period individual taxpayers (31%), corporate taxpayers (28%) and Value Added Tax (27.1%) accounted for the bulk of government income. The balance is made up of the fuel levy (4.6%), customs (4.8%) and a range of other taxes (5.6%).

One thing is certain. Manuel won’t be able to squeeze more money from the corporate tax category in the next few years. Plummeting commodity prices and decreasing global demand for base metals and other construction inputs will put a serious damper on 2009 (and probably 2010) full year earnings in the previously buoyant resources sectors. At the same time banks and financial sector companies are wrestling with higher credit impairment charges as consumers struggle with record high debt and unmanageable debt repayment to income ratios. And the manufacturing sector is in the doldrums due to plummeting demand for motor vehicles and softer global growth prospects. To make matters worse Manuel will be under pressure to provide further tax incentives to the corporate world to stem job losses and encourage new business ventures.

With corporate revenues under fire government will have to turn to Value Added Tax (VAT) or the individual to make up the shortfall. We can definitely rule out a blanket increase in the VAT rate because of the impact this would have on the poor. But Ernst & Young says it’s possible that Treasury would consider a higher VAT rate for high-end goods as a form of luxury tax. It’s a long shot and contradicts the South African Revenue Services’ focus on improved collection efficiencies. We doubt they’d stray from this path by making VAT administration an absolute nightmare. Besides – complex VAT systems are open to abuse.

You can pay more tax without even knowing it

Of all the strategies SARS could employ to boost its annual revenue collection, Ernst & Young believes that pushing up the contribution from individual taxpayers is the easiest to accomplish. Government will do this by raising personal income taxes “on the back of higher inflation and higher wage settlements.” Remember, Manuel doesn’t have to increase the top rate to get more money from us. He can simply take this money by stealth; by leaving the income tax threshold unchanged. But it doesn’t have to come to that. SARS could still boost revenues by continuing its registration drive (thereby expanding the tax net), enhancing its revenue collection system with initiatives like e-Filing and focussing on enforcement. Individual taxpayers should expect SARS to take a very touch stance on any tax transgressions… So get your personal tax in order.

A number of trends will be reversing by the time Manuel announces the 2009/2010 budget. Some, like the reversal in GDP growth, are beyond government’s control. But growing government debt and the swing from fiscal budget surplus to deficit will come as a direct result of increased spending. Apart from the R173bn government is expected to pump into the economy over the next three years to “offset the global liquidity crisis” Manuel will have to find R42bn in 2009/2010 if government hopes to make good on the ruling party’s 2009 election promises. And the money to fund these promises will come from you and me.

Editor’s thoughts:
Nothing is certain but death and taxes! Over the last few years we’ve benefited as improved collections at SARS made it possible for varying levels of tax relief each year. But the party is finally over. Tax revenues will be hit as GDP growth slows, unemployment rises and corporate earnings plummet. Are you prepared to sacrifice more of your personal income to fund government’s wide-reaching social objectives? Add your comments below, or send them to gareth@fanews.co.za