Increase revenue through economic growth, not taxes – BLSA

It will be much better for South Africa if government revenue is increased through economic growth instead of increasing taxes. This is especially important now since the government of national unity (GNU) has the chance to deal with the country’s growth challenges by kickstarting the economy.

Business Leadership South Africa (BLSA) CEO, Busisiwe Mavuso says in her weekly newsletter that she was struck by research released last week that showed there are limits to how much revenue South Africa can raise by increasing taxes.

The research examined the top marginal tax rate’s increase from 41% to 45% in 2017 and found that instead of increasing the revenue that might be expected from mathematics alone, it fell far short.

Mavuso says this was likely because taxpayers responded to the increase by finding ways to circumvent it. “Many reduced earnings and perhaps most concerning, there was a drop in output by firms that employ those in the top tax bracket. Other factors that could have played a role include emigration and tax evasion.”

The United Nations University’s World Institute for Development Economics Research (UNU-WIDER) analysis found that rather than the R5.5 billion of extra revenue that should have accrued from the mathematics of the increase, there was actually a R6.5 billion reduction in total personal income tax revenue collected. The increase in the tax rate led to a fall in the tax revenue collected.

ALSO READ: Many wealthy taxpayers are leaving SA due to increasingly high taxes

Increasing taxes can inflict significant economic damage

“We have made the point often enough that you cannot increase revenue simply by increasing taxes, but you can inflict significant economic damage. This point has been important in debates about how feasible it is to fund major new social programmes through higher taxes.”

Mavuso says the proposed National Health Insurance (NHI) scheme is one example, with the funding remaining an unresolved issue. Conservative estimates put the cost of the scheme at over R200 billion if it provides relatively minimal benefits and much higher for more comprehensive cover.

“Given that the state currently expects to raise almost R2 trillion in total taxes this year, it would require a 10% increase in the revenue raised. Similar considerations apply to proposals for a basic income grant which could cost R300 billion depending on the amounts available.”

When considering how to raise more revenue from taxes, the key is the relationship between tax rates and tax revenue, Mavuso says.

A 10% increase in tax rates will not raise 10% more revenue. In fact, the UNU-WIDER paper shows it may have a net negative impact, actually reducing the total tax that can be raised.

She points out that other forms of tax could behave differently. Consumption taxes like VAT will be difficult to avoid and probably raise revenue, but income taxes like personal income tax or taxes on company profits will not.

ALSO READ: Tax hike will hit where it hurts

Most concerning finding: High-earner companies reduced sales

“Perhaps the most concerning finding of the paper is that companies that employ top-bracket earners reduced sales after the increase. The authors say this is consistent with reduced efforts by top earners after the tax hike. This is obviously negative for GDP overall.”

Mavuso says this finding should be taken as a clear indication that we cannot deliver expensive social programmes without a dramatically negative impact on the economy.

“The only sure way to increase revenue is to increase economic growth, an objective shared by government and business and one we are working together to achieve. With economic growth comes tax revenue that can be used to deliver social services.”

The GNU continues to make the right signals in this regard, Mavuso says. She touched on the risks to the South African economy due to a deterioration of the country’s relationship with the United States before.

“Following the diplomatic gaffes, we made over relations with Russia in the last two years, including the Lady R debacle and joint military drills, US politicians were understandably concerned. So much so that they introduced a bill in Congress to undertake a full review of the SA/US relationship.

“That bill was passed earlier this month by the House of Representatives, although it must still get through the Senate to become law. I was pleased to hear DTIC minister Parks Tau say he would lead a delegation later this month to the US for a summit on the African Growth and Opportunity Act.”

ALSO READ: Increasing taxes to fund NHI will ‘destroy economy’ – expert

GNU’s opportunity to rebuild US trade relationship

Mavuso says this is an opportunity to start rebuilding the relationship. “The new government of national unity can strike a quite different note in our international relationships compared to the previous administration.

“We need to maintain positive trading relationships with markets in the West at the same time as trade grows with the East. The nature of the trade differs markedly between the two, with markets like the US and Europe consuming far more value-added products like vehicles and services, while our trade with the East is dominated by the export of raw materials and import of manufactured goods. Trade with the West therefore supports much deeper supply chains in SA and more employment.”

It is these kinds of steps that build confidence demonstrating that the GNU can make progress in dealing with our growth challenge, Mavuso says: “It is the one clear way we can provide a better life for all as it creates employment and tax revenue. We in organised business are eager to bring our skills and resources to the partnership with government so that we can jointly deliver that.”