22 February 2018

South Africa: Budget - Civil Society Demands Progressive Taxation

Most commentators seemed fairly resigned to switch to the more regressive tax policy announced in this year's Budget Speech, saying it's the only way to fill the empty coffers. But civil society is having none of this.

Here is one statement sent on behalf of the Institute for Economic Justice, Public Service Accountability Monitor (PSAM), Section 27, SPII (Studies in Poverty and Inequality Institute) and the Dullah Omar Institute's Parliament Watch

As civil society organisations we are alarmed at the regressive taxation measures proposed in the 2018 Budget Speech, particularly the proposed VAT and fuel levy increases. While we recognise the need to raise additional revenue for the national fiscus, the proposals made to Parliament by Minister Gigaba make the tax regime more regressive and stand to exacerbate already unacceptably high levels of poverty and inequality.

A reconsideration of the tax regime is not a matter to be taken lightly, and therefore not a matter National Treasury can unilaterally decide on. Such decisions can only be made after their potential effects, particularly for the most vulnerable, have been assessed and exhaustively debated, and where the proposed changes are demonstrated to be in the interest of realising a more equal society.

We disagree with the Minister that the proposed rise in VAT from 14% to 15% will have limited impact on the poor.

We call on Parliament's Finance Committees to interrogate National Treasury's proposals, ensure that the voices of the most disadvantaged are heard, and if necessary, exercise the power given to them in the Money Bills Act of 2009 to set aside proposals that will negatively impact the state's ability to realise substantive equality and redress as set out in Section 9 of the Bill of Rights.

We disagree with the Minister that the proposed rise in VAT from 14% to 15% will have limited impact on the poor. While the majority of VAT revenue will naturally come from wealthier people who earn and spend more, the Minister acknowledged that his VAT proposal will increase the cost of living for all households. However, some are hit harder and the ability of households to afford the increase is different across income groups. In fact, taxes on goods (VAT plus excise duty) hit the poor hardest. The lowest earning 10% spend 13.8% of their disposable income on these taxes compared to 12.6% of the highest earning 10%.

Existing imbalances in the tax regime must be acknowledged prior to implementing regressive measures such as an increase on VAT. Personal income tax rates have fallen in real terms for many years and the World Bank finds that South Africa's effective corporate tax rate is well below emerging market peers and the fifth lowest in Africa. Wealth, and income from wealth, is undertaxed in South Africa - in the context of the unequal accumulation of assets under apartheid this is indefensible.

It must also be acknowledged that tax revenues have been negatively impacted by political interference associated with state capture at the South African Revenue Service (SARS) with billions lost annually to corruption. The auditor general, for example, recorded R46 billion in irregular expenditure in 2016/17, not including all state owned enterprises. The poor should not bear the brunt of this and our elected leadership should set an example by lowering their own salaries. All efforts must be made to recover stolen funds.

The VAT hike, together with increases to the fuel levy and excise duties, must be seen in the context of the costs of livings faced by the poorest. For example, over 5 million children live below the food poverty, meaning that their caregivers are unable to provide them with sufficient food, leaving aside the additional costs of transport, clothing and shelter. The proposed fuel levy increases exacerbate this burden, as, owing to apartheid's spatial legacies, poor families already spend a disproportionate and crippling share of their disposable income on transport.

Together with the tax hikes the limited increases to social grants will further erode the spending power of the poorest. The 5.6% increase to pension grants (until October 2018) is, on its own, below levels of inflation faced by the poor.

We believe that our tax regime can and must be made more, not less, progressive. National Treasury must satisfy both the public and the Finance Committees that increases to other taxes are not viable. The use of VAT as a major source of revenue is only acceptable if it is accompanied by measures to significantly lessen its regressive impact. This is why civil society has historically called for a combination of expanding the range of zero-rated VAT goods, while implementing a higher VAT band for luxury goods (this could be tax neutral). Decisively acting on mismanagement at SARS and reinvigorating efforts to curb tax evasion, which will significantly boost tax receipts, is also essential.

The Fiscal Framework and taxation proposals now await approval by Parliament's Finance committees.

We call for:

A comprehensive consultation process on all proposals to amend the tax regime prior to the enactment of any proposed changes.

National Treasury to present their evidence that VAT will only have a limited impact on the poor, and to demonstrate that all other options would be of greater detriment to the most vulnerable. Treasury must also be asked to present the gender differentiated impacts tax measures will have; as caregivers women are likely to be the hardest hit, and this cannot be ignored.

National Treasury to explain which other options have been considered and why the existing proposals were adopted. We question Treasury's claims that VAT is the least harmful for economic growth, and expect Members of Parliament to do the same.

National Treasury to demonstrate that the regressive tax measures, coupled with the proposed austerity measures, will indeed protect frontline services.

Parliamentary committees to exercise their powers to amend or reject regressive tax proposals.

The country's political leadership to take responsibility for the billions stolen over the past years by setting an example through reducing their own salaries, including those in Parliament.

The purpose of a progressive tax and redistributive policy is to enable the government to rectify South Africa's legacy of inequality and injustice and fulfil the promise of a better life for all. This is an urgent task. Any change to the tax regime must be one reduces inequality and does not place additional burdens on the poor while ensuring government raises sufficient revenue to deliver on its constitutional obligations to provide, amongst other things, public health care and education, social welfare, decent housing and affordable public transport.

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