Believe it or not, there are ways to raise taxes without pain
Taxation could even be a weapon for good if the SA government went about it the right way
It is trite to say that finance minister Tito Mboweni finds himself in a dark corner with lots of ideas but little support for implementing them.
Many fear that on the back of political weakness to tackle the real issues — structural reforms at state-owned enterprises (SOEs) and the public sector wage bill — tax increases are looming in the February budget.
Most South Africans already feel overtaxed and underserviced, and though tax is universally hated, it could be used as a weapon for good, says Patricia Williams, partner at law firm Bowmans.
Many countries have introduced innovative ways to use tax to address income and wealth inequality and even contribute to changing “bad behaviour”.
One way to change bad behaviour is to consider an income inequality tax, similar to the one proposed by US presidential hopeful Bernie Sanders.
One way to change bad behaviour is to consider an income inequality tax, similar to the one proposed by US presidential hopeful Bernie Sanders. He suggests that a company’s corporate income tax rate should be increased by 0.5% if its CEO earns 50 times more than the average worker in the company, up to a maximum of 5% if the wage gap is 500 times.
The corporate income tax rate in the US is 21%. In SA it is 28%. Williams says an inequality tax may lead companies to reconsider whether it is worth their while to have such a highly paid CEO.
Taxing the wealthy has always been a heated and hated topic. In truth there are some extremely wealthy people who are not in the tax net or who are able to plan their affairs in such a way that they pay far less tax than those who are mere salary earners.
Wealthy South Africans are emigrating to break their tax ties with the country. “People are emigrating ahead of death,” says Williams. They also use trust structures to avoid paying estate duty.
Nothing illegal about this, says Williams, who is also vice-chairperson of the tax administration committee of the SA Institute of Tax Professionals.
The reality is that they have been accumulating wealth in SA for decades and, though they pay an exit tax (capital gains tax on the deemed asset disposals when they emigrate), those who cannot emigrate do not escape the estate duty burden.
“It does at face value look like a lovely loophole for wealthy people to take advantage of,” she says.
We do not want tax increases to be a Band-Aid that we slap over a gunshot wound.Patricia Williams, partner at law firm Bowmans
SA is supposed to have a progressive tax system with poor people bearing less of the tax burden than the wealthy. Imposing an “exit tax” on wealth on a sliding scale based on age, and not only on capital gains, could address this, explains Williams.
Another vehicle available to the wealthy to avoid estate duty is trusts. She says assets that are held in a trust — such as the shares of the family business — do not form part of the estate when the owner dies.
This similarly applies to all the beneficiaries of the trust, and there is even the possibility of escaping capital gains tax by simply keeping the shares or assets in the trust. Williams says many countries have now introduced an annual tax of, for example, 0.5% on the value of the assets in a trust.
Another innovative suggestion came from a participant in the cryptocurrency market who suggested a flat rate of 6% on cryptocurrency transactions in SA — if the rate remains set for a reasonable period and there is no capital gains tax on the transactions.
This may increase SA’s attractiveness as a cryptocurrency market, which could see a flood of transactions and tax collections, says Williams.
“We do not want tax increases to be a Band-Aid that we slap over a gunshot wound. We have to deal with the underlying problem as well. We have all been vocal about the fact that we are spending more than we earn. That has to stop,” she says.
Delia Ndlovu, Deloitte’s MD for Africa tax & legal, says there are good, solid and simple ideas to get SA out of its “perpetual fiscal trap”. “If only the government will embrace these ideas it will take the country a long way.”
Until that happens, the government is like any ordinary household that is in trouble, says Deloitte director and transfer pricing specialist Billy Joubert. “The immediate demand on the money is so high that we cannot think beyond the current crisis.”
A bold move would be to reduce the corporate income tax rate and to give companies tax breaks on the number of people they employ.
“We should be less concerned about corporate tax and more concerned about tax collections through VAT and individual income tax if unemployed people are drawn into the tax net through employment,” says Joubert.