‘Increase in corruption could trigger tax revolt’

The greater the level of corruption in South Africa, the less tax integrity the country would have and the greater the possibility of a tax revolt.

Speaking at the Fourth Annual International Economic Law Update hosted by the Mandela Institute at the Wits School of Law in conjunction with the World Trade Institute and Swiss Economic and Cooperation Development, Judge Dennis Davis, chair of the Davis Tax Committee, signalled this warning.

He said people of all classes, genders and race groups have been asking him the same question: Why should they pay tax when the level of corruption in South Africa is endemic?

His observation comes just two weeks after Finance Minister Nhlanhla Nene in his Medium-Term Budget Policy Speech (MTBPS) lowered his economic growth forecast for 2015 to just 1.5% from 2% in February – signalling a challenging road ahead for tax collection. At the same time expenditure has been difficult to contain. A major point of contention in the MTBPS was the public sector wage increases, which at 10.1% was significantly higher than the inflation figure of roughly 6%.

Government is trying to secure income to finance its development goals but also to narrow its forecasted budget deficit of 3.8% of gross domestic product this year to 3% over the medium-term.

While the Davis Tax Committee’s mandate is focused on the revenue side of the tax equation, Davis stressed that South Africa carefully had to consider and debate the need, sustainability and impact of its expenditure decisions.

Davis said a country in South Africa’s parlous economic position couldn’t afford to continuously award wage increases of 10.1%. This would result in a funding shortfall for universities, schools and other capital infrastructure.

He said he also doesn’t understand why the country has continued to spend billions bailing out South African Airways (SAA).

“The amount of money we spent on SAA in the last budget by the way would cover the R2.7 billion [shortfall for the funding of university fees] if you just simply focus attention on it.”

After widespread #FeesMustFall student protests in October, President Jacob Zuma announced a 0% increase in university fees, leaving a funding shortfall of roughly R2.7 billion.

Davis said he also didn’t understand why two additional universities had to be built. If the roughly R2 billion or R3 billion allocated to these universities in the last budget were redirected to the National Bursary Fund then, the country could have ensured that far more impoverished people could attend university without paying fees.

“We can’t afford these things. We have to understand where our priorities are.”

Inequality

During his recent visit to South Africa French economist Thomas Piketty raised the possibility of a wealth tax to address inequality.

Davis said figures produced by professor Murray Leibbrandt from UCT and used by Piketty showed that when apartheid began in 1948 the top 1% of the South African population received about 22% of income, compared to about 9% in France and 11% in the US. By 1975 the share of South Africa’s top 1% had dropped to about 10% and remained there until 1991, but since the end of apartheid it has gone back up to almost 20%.

“The truth about it is that we’ve done appallingly in relation to questions of inequality.”

Davis said something had to be done about inequality. While the tax system can’t solve the entire problem, it can address certain aspects of the issue.

“We are going to investigate a wealth tax. That I can assure you.”

He said this process would take time as – with the design of any potential tax – it had to be done thoroughly and thoughtfully.

The Davis Tax Committee also recently released its recommendations on estate duty.

Davis said above a certain level a proper estate duty should seriously be considered.

While its report indicated that the first R12 million could be ring-fenced, he admitted that this amount might have to be increased as middle-class South Africans are taking huge strain, but extremely wealthy people should be prepared to pay more estate duty, he said.

Davis estimated that the country could probably raise another R3 billion from estate duties, which would cover the student-funding shortfall of R2.7 billion.

“Are we seriously saying as a nation we are not prepared to do that?”

Two other areas where potential tax revenues could be collected to supplement the state’s coffers are in the areas of base erosion and profit shifting (BEPS) and undisclosed assets held offshore.

Davis said when the previous amnesty was implemented in 2003, it collected more than R7 billion.

“My information is that there is a lot more than that waiting to be collected. And I don’t want to go further but we are certainly sending the minister a series of recommendations in regard thereto. My view is people are either going to have to pay up or frankly we should prosecute them.”

Davis said the tax statistics suggest that there is only a very small group of people with a taxable income of R5 million or more – this was because most very wealthy people make their money from dividends and capital gains.

He said there is no reason why, once a certain limit is reached, capital gains tax (CGT) could not be increased. When CGT was devised the reason why only a small percentage of the gain was taxed was because inflation was much higher at around 11% or 12% compared to the current figure of roughly 6%. This means there does not have to be such a significant allowance for a capital gain as there previously was because at the moment more of the gain is real than when the system was introduced.

“And there is no reason why corporates shouldn’t pay a 100% tax on capital gains as they do in Australia. And so there is probably another R7 billion or R8 billion in the system.”

Davis said the tax committee is investigating all these questions to deal with the issues of inequality, while also being cognisant of the deficit and not disturbing the income tax system.

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