Tax Policy and the State of Our Nation

It’s that time of the year again in South Africa when tax advisers like me get to feel like a rock star, with tv and radio appearances and our followers on X edging closer towards the three-digit mark.  Ah yes, we certainly do enjoy budget speech month in South Africa but, apart from our dashing good looks and charming ways, there is a reason why we are called upon to make comments in the buildup to and aftermath of the budget speech. As tax advisers we are well placed to comment and provide insight on the existing and proposed tax policy tools, but I find myself increasingly asking “What is the point?” as the concept of tax policy as a means of achieving economic goals (and there are many to achieve) has all but disappeared. Like almost every other aspect of our experience with National Government, the annual budget speech has become a real-life version of Groundhog Day, with the same old “tax policy proposals” every year, increases in sin taxes, addressing bracket creep, and some obligatory comments around NHI and unemployment. Oh yes and the annual increase to the social welfare grant is certainly made out to be a big deal every year by our Minister of Finance, and sadly it is for the millions out there who rely only on that source of income to feed many mouths and keep a roof over many heads.

Will the real tax policy please stand up! Rock star, famous rapper, I’ll take anything in my month of sun.

But what can be done you may ask. The answer is lots. For example, creating jobs could be the easiest thing in the world if a tax policy tool existed to give companies a meaningful tax holiday for jobs created and sustained over a number of years. We are of course aware of the Employment Tax Incentive but with the unemployment rate being what it is I leave it to you to decide how effective this incentive has actually been.  And of course, the Employment Tax Incentive cause wasn’t helped when the South African Revenue Service felt aggrieved and shut down various schemes because companies dared to benefit from the incentive by training and paying otherwise would-be unemployed youngsters at a cost to the fiscus.

Now, you may say that I’m a dreamer because of what I will write next, but I assure you I’m not the only one.

In my view, it is as clear as day, and has been for some time, that our overall tax policy is incorrect at the most fundamental level, i.e. headline tax rates. In particular, the corporate income tax (“CIT”) rate is relatively too high, and the value-added tax (“VAT”) rate relatively is too low. This is not the forum to bore you with all sorts of economic jargon around tax buoyancy ratios, etc and provide technical support for my contention, but consider for a moment a world in which CIT is reduced to 20% and VAT is increased to 20%.  What would companies do with the extra tax saved, throw a party? There is just so much more in heaven and earth is there not for us apolitical folk.

No, bona fide companies run by bona fide business-people and investors would give effect to a combination of (a) investing in or expanding capacity/business operations, (b) employing more people, (c) pay off what is often debilitating debt that hamstrings business at every turn. The effect of these would all be profound for the economy at large. More productive capacity, less debt (with less interest paid) leads to what?

And what of all these additional employees these companies can now afford to recruit with all their tax savings? Or the additional returns to investors in the form of dividends? Vivid images of water bottles thrown by brightly dressed politicians spring to mind.

The non-political and non-misinformation answer is quite simple. Savings will rise, households will pay off debt, and most importantly expenditure will rise triggering higher VAT collections at the higher rate of 20%. A multiplier effect (to coin that famous economic phrase) on our economy which will significantly increase tax collections, levels of savings and investment in the economy, and (most crucially) levels of employment.

And that, as they say, is a wrap.  Let’s see what actually happens on Budget Day, and I’ll certainly be hoping, albeit jadedly, for the best.

Music cue: “they say we’re young and we don’t know, won’t find out until we grow…”