FINANCE: Focus Shifting from Wealth Taxes to Fiscal Accountability As Gordhan’s Tax Options Diminish
Recent Western Cape Business News
Finance Minister Pravin Gordhan is under increasing pressure to extract more wealth taxes when he delivers his budget on 22 February. But South Africans are already heavily taxed compared to citizens of our BRICS (Brazil, Russia, India and China) peers.
“South Africa’s tax rates are, on a whole, very comparable with developed first-world nations such as Australia, the U.S., UK and EU member states - where similar allowances are provided before the deduction of tax and with progressive marginal rates up to 40-45%,” says Gavin Smith, Head of Africa for deVere Acuma, part of the deVere Group, one of the world’s largest independent financial advisory organisations.
“Conversely, among BRICS nations which are the more obvious comparison, we see no such correlation with top-tier income tax rates at 27.5%, 13%, 30%, 45% and 41% respectively.”
“Income tax, the one we feel as we collect our pay cheques, could be seen as a hefty percentage to hand over compared to our peers,” says Smith.
For many South Africans who are taxed at the highest levels, the concerns are less about the tax rate than about transparency and accountability when it comes to fiscal spending. Gordhan’s challenge is to show taxpayers, who are essentially government’s funders, how government has lived up to its promise to improve its ability to spend this money wisely.
“Many developing economies face a dilemma when seeking to raise tax revenue. The easiest method is to extract more tax from existing taxpayers,” says Tom Elliott, deVere’s international investment strategist. “It is administratively cheaper, and has less risk of incurring the wrath of the wider population, than trying to broaden the tax base and spreading the load across more shoulders.
“South Africa faces such a dilemma and appears to be taking the easier option.”
However, Elliott says, increasing the tax burden on existing taxpayers comes at a cost. “It could encourage high earners to hide their earnings, effectively stimulating the informal economy that any government should be trying to make formal (and taxable).
“It could also drive talent out of a country. This was a feature of the UK economy in the 1960s and 1970s, and was only reversed when the Thatcher government made deep cuts to marginal tax rates facing high earners.
“The South African economy could suffer a much more severe version of this due to political uncertainty. Raising taxes on high earners could accentuate the problem of talented South Africans leaving the country.”
deVere advises its clients to be aware of any changes in relevant taxes and duties when it comes to financial planning. “Start with your savings and pensions. Have you explored all the avenues available to you? Are you able to save more?”
It also makes sense to look at investing overseas, Elliott says, particularly if future retirement, education or business plans will require foreign currency funding.
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