Higher VAT was a good idea; it should be even higher!

Business

Higher VAT was a good idea; it should be even higher!

But only if you reduce income tax, or cut it altogether

Mark Barnes

The truth is that the ponds from which the government can fish have diminished, and continue to do so. We have little choice but to cast our net over a wider dam. There was no choice but to increase VAT in the budget.
The increase in VAT from 14% to 15% is of course a 7% increase, not a 1% increase. Compounding that with other consumer tax increases such as excise duties and the fuel levy, while still also increasing the marginal tax rate for individuals, doesn’t bode well for the already over-indebted person in the street (most of us). Perhaps the Reserve Bank should have announced a reduction in interest rates to accompany the budget tax increases?
There has been almost universal condemnation of  the choice to increase VAT, and some of it may be due – it certainly doesn’t help with inequality, as it works today.
Think of it differently. VAT (or some similar construct) might well be, structurally, the solution to an efficient budgeting process. Every year (or as often as you like) the required VAT to be applied to the constituent goods and services in our economy can be scientifically and accurately determined to balance the budget. The upside of effective budgeting, of predictable outcomes, will result in a lower cost of capital for the country, for everyone. Dropping the cost of sovereign debt by 1% has a better than 10% positive impact on the economy.At issue is that VAT should be instead of, not in addition to, other personal taxes like income tax!
Eliminate income tax completely (imagine the increase in spending – selective as it may be), and increase VAT accordingly. VAT will have to increase substantially, at the top end, but with alternative rules and grades, an equilibrium could be found which behaves exactly like progressive tax. We need to go beyond the simplicity of zero-rated items and consider baskets of goods and services that factor in the need to address economic inequality.
Sure, the highest VAT rate (applicable to top-end luxury and, particularly, imported goods) may be a big multiple of what it is today (even over 100%), but the consumer has the choice – whether to buy the goods and incur the tax or not. In any case, I’d be curious to know what the all-in effective tax rate for luxury purchases is already. By the time you’ve paid income tax, fuel levy, VAT on your car, interest you earn on your already taxed savings, the capital gains tax and transfer duty paid on the sale of your property, the after-tax cost of educating your family, the food you buy out of after-tax earnings (plus VAT) … I could go on – there will be plenty of scope to pay VAT instead.
Across the earnings spectrum, from the poor to the wealthy in our society, there are enough statistics, aided by real-time access technology, to work out a scientifically fair distribution of VAT levels applied such that inequality begins to be addressed.VAT collection is simple to administer and it is collected in real time. There is something virtuous and feel-good about a pay-as-you-go lifestyle of choices for the individual. You decide whether to spend or save (there’s no tax on savings, remember). Tax revenues will be collected practically in real time – no delays – which will have a significant effect on the present value of receipts to the fiscus. We pay today, we know what we paid, we paid it on purpose, SARS has its cash.
With continuing advances in electronic transacting (and the ability to monitor these – with all of the necessary privacy caveats) the need and cost of oversight and administration will be almost eliminated, as will the opportunities for cheating and evasion.
I can’t imagine how much revenue is lost to the government through tax evasion – an entire industry of advisors and tax havens thrive on it, locally and internationally. More tax is paid by the compliant, hard-working middle class than the super-rich (corporations and individuals), I’ll bet.
After satisfying basic infrastructure and social imperatives, if we then spend tax receipts in the industries from whence they came, we create a virtuous loop that will lead to the creation of local centres of excellence (voted for by the consumer tax rand), that can aspire to become global competitors. VAT structures could also replace import tariffs, encouraging consumers to support local industry.
We’ll have more discretionary disposal income, to spend on what we want, if we choose – that has to grow GDP.
Mark Barnes is CEO of the Post Office.

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