AS the date for Finance Minister Pravin Gordhan’s budget speech approaches, economists and financial experts wrap their brains around the possible outcomes for what is considered to be one of the most influential yearly messages to the nation.
One theory has been whether Gordhan should announce trimming the country’s high tax rates to give the sluggish national economy an encouraging nudge in an upward direction.
KPMG Corporate Tax Director Yasmeen Suliman is in full support of the idea, believing that South Africa’s languishing economic growth and ‘dangerously high’ unemployment levels will cause a decline in tax collections and, in turn, balloon the government deficit.
‘According to the Laffer Curve, as tax rates increase so do tax collections, but only to a certain point, after which as tax rates increase, tax collections actually decline.
‘So when a country is on the declining part of the curve, a tax rate cut will actually boost tax collections.
‘This theory has been shown to work in practice in the USA in the previous century.
‘It has also been shown in overseas examples that a tax cut had a positive impact on economic growth and unemployment levels, which explains why tax collections increase over the medium to long term – even though tax rates have been reduced, there is a larger base to collect taxes from.’
But Head of Department of the Economics Faculty at the University of Zululand Dr Irrshad Kaseeram said a tax rate cut in South Africa will lighten the weight for too small a population to set the desired results in motion.
‘Owing to the global recession the last five years, our economy has been in decline and is only expected to grow at 2.7%.
‘Hence a rate cut might just be a token, but it will only attract the votes of the middle class, which consist of less than five million people and most of them are possible DA supporters.
‘It will not do much in the way of boosting the economy – only a tax cut in the region of 5% to 10% will achieve the outcomes that Ms Suliman predicts,’ said Kaseeram.
IN BOX:
Kaseeram notes why government would not allow tax rates to be slashed:
· Tax cuts would increase the state’s borrowing, which they promised the Investment Rating Agencies will not happen.
· With upcoming elections, the ruling party will thrive to keep their voters happy, most of whom are part of the 16.1 million recipients of social security grants and transfer payments.
· Gordhan will most likely increase incentive spending to the poor in terms of social projects and service delivery.
‘It is, therefore, unlikely that a tax cut will arise and if it does, it will not be significant enough to get the economy out of the doldrums in the short to medium term,’ Kaseeram said.
