The VAT Increase is an Assault On The Poor And Lower-Income Earners

South Africa is a highly unequal society and a unilateral increase on the least progressive tax component – Value Added Tax (VAT) – is harmful to poor and lower-income earners. Finance minister Malusi Gigaba tabled the 2018 budget on 21 February, announcing that VAT would increase from 14% to 15% on 1 April as a means to close the R48.2 billion gap in revenue.

This is a highly controversial decision considering the high levels of poverty and inequality in South Africa. The Daily Vox had an interview with Gilad Isaacs, the director of the corporate strategy and industrial development research programme at Wits University Gilad Isaacs for clarity.

What is VAT and why is it considered a regressive tax?

“VAT is a tax charged on goods and services, on things which one buys. Essentially it is a certain amount which is added on to any price of a goods or service which you are purchasing,” Isaacs said.

VAT is charged on almost all goods or services.

It is currently charged at a rate of 14% and levied irrespective of how much somebody earns. This makes it a regressive tax. Taxes on goods (like VAT or excise duty) have the worst impact on the poor. South Africa’s lowest earning 10% spend 13.8% of their disposable income on these taxes compared to 12.6% spent by the highest earning 10%.

What are the impacts of a VAT increase?

“It will certainly do nothing to reduce inequality levels. We believe that there is a significant danger that it will undermine the spending power of poor people and increase inequality,” Isaacs said.

Sounds like a bad idea, how does government justify it?

Raising VAT increases inequality according to the Davis Tax Committee. It makes basic goods more expensive and means there needs to be a proportional increase in social grants and wages to offset its negative impact on the buying power of the poor and lowest earners. Isaacs said Treasury justifies the VAT increase using highly improbable assumptions. These are:

1. It’s a very easy tax to increase.

2. South Africa has seen significant increases to personal income tax: this isn’t accurate. We’ve seen a consistent fall in tax rates which went from 45% in 1989/1990 to 40% in 2008/2009, and then increased by a percentage point to 41% in 2016/2017. “We’ve seen overall a fall [in personal income tax] and recently very modest increases,” Isaacs said.

3. By international standards we have high corporate income tax: this is also untrue. Overall, South Africa has a lower corporate income tax than other emerging markets, and the fifth lowest in Africa.

4. It won’t harm the poor because of zero-rated items: but not all food items that the poor buy are zero-rated. (More on this later.)

5. The increase in social grants will partly offset the increase: this is also untrue because while there have been increases in social grants, these are not significant enough to offset the VAT increase, Isaacs said.

Okay, what does it mean to zero-rate certain goods?

The VAT Act of 1991 provides for certain so-called basic foodstuffs to be zero-rated – or not charged with VAT included. Zero-rated items include brown bread, dried mealies, dried beans, lentils, tinned or canned pilchards or sardinella, rice, fresh fruit and vegetables, vegetable oil, milk, eggs, and edible legumes.

The zero-rated foodstuffs list is contentious because of the items it does not cover, and there are calls to extend the list to more foodstuffs but also to items that are not foodstuffs.

Also, the zero-rating only applies when the items are bought over the counter and is not available when provided as a meal, ready for consumption when supplied.

Will zero-rating specific goods help the poor?

“The idea that the zero-rated items offer a sufficient cushion is false,” Isaacs said to The Daily Vox. Zero-rated items are based on an assumption of what food items poor people eat, which is not always accurate.

The Pietermaritzburg Agency for Community Social Action (PACSA) Food Barometer for January 2018 shows that when food increases are combined with a fuel increase, poor households move away from items that are zero-rated because they take a lot of fuel to cook.

Statistics South Africa’s Poverty Trends in South Africa from 2006 to 2015 also shows that poor South Africans only spend 30% of their income on food. All others items that they spend their money on can be charged with VAT.

What alternatives could have been instituted instead of a VAT increase?

The list of zero-rated items should be increased to target more goods bought by the poor and not limited to foodstuffs. It should include items like: poultry, flour, candles, soap, basic medicines, prepaid airtime, and education-related goods. It can be argued that this will also benefit higher-income earners but the share of disposable income spent on these goods by the poor is higher.

A higher VAT rate should be charged on luxury goods only by the rich, like yachts, and upper segments of other goods markets, like fancy cars and expensive fridges. However, the selection of items should not include goods that poorer households save for.

Excluding VAT, the revenue gap could have been closed in a number of ways such as: repairing the administrative capacity of SARS; raising personal income tax, especially for the highest earners; increasing corporate income tax; instituting an annual net wealth tax; instituting a land tax, particularly on unused land, and increasingly property taxes, particularly on non-residents and those owning multiple homes; increasing other taxes on property or income from property such as capital gains tax, estate duty and securities transaction tax.

Featured image via The Blue Diamond Gallery