Fiscal Pressure - Tax hikes are not the solution
South Africa suffers from a trifecta of social challenges, namely: inequality, poverty and high levels of unemployment. This, when coupled with the state of economic stagflation, rampant government expenditure and bureaucratic paralysis is creating unprecedented fiscal pressure.
Tax revenue, as described in the Medium Term Budget Policy Statement, is projected to fall short of the 2017 Budget estimate by ZAR 50.8 billion, the largest under-collection since the 2009 recession. The shortfall can be reduced either through fiscal consolidation or by increasing taxes and cutting costs.
On Friday, 24 November Standard & Poor's Global Ratings lowered South Africa's rand debt to "junk-status" and cut the foreign-currency rating to two levels below investment grade. In response, President Jacob Zuma tasked the Minister of Finance and Presidential Fiscal Committee to cut spending by ZAR 25 billion in next year's budget and find ways to add ZAR 15 billion to the nations revenue. Given South Africa's narrow and deep tax base, where a limited number of people are highly taxed, further increasing taxes is a contrived solution.
It has been suggested that the capital gains tax (CGT) rate be increased further so that the full capital gain realised on disposals is taxed. The CGT inclusion rates are currently 40% in respect of individuals and special trusts; 80% in respect of companies and 80% in respect of other trusts. The CGT rates stated above were only introduced on 1 March 2016.
Moreover, due to the recent increase in the maximum marginal income tax rate for individuals and trusts to 45%, the effective CGT rate increased from 16.4% to 18% for individuals and special trusts and from 32% to 36% for other trusts. The effective CGT rate for companies remains unchanged at 22.4%. In our view, the benefits of the above increases are yet to be fully-realised and any further increases in the effective CGT rates now would only serve to reduce the appetite of investors and make it more expensive for companies to conduct business. We submit that the cumulative effect of the above revisions should first be fully taken into account before additional taxes are introduced to overburden the already strained South African taxpayer.