Tax revolt may worsen if Gordhan targets PIT to fill gaps

When the government is looking for extra money, all signs point to personal income tax (PIT) because increasing VAT and Company Tax have political and investment implications that's currently difficult to counter, says a tax expert that spent 14 years of his career developing tax legislation, especially closing loopholes, at the National Treasury.

Professor Keith Engel, an American with South African citizenship and currently chief executive of the South African Institute of Tax Practitioners (SAIT), said in an interview on a radio station (FM Classic) that higher income earners will be targeted.

 "Because the super rich is usually more tolerant...  (and) able to withstand tax hikes, the middle income earners may suffer the most. In an election year and with the rating agencies on our back, alternatives look highly unlikely."

He added tongue in cheek: "One would of course have liked to spread the tax burden, especially to the masses who voted for this government." It is widely accepted that Finance Minister Pravin Gordhan will raise taxes in his Budget speech in Parliament today (Wednesday) to help prevent a downgrade of SA’s debt and investment position to junk status.

That is because the budget deficit and debt position will have to be reduced faster than the targets set in the mini budget in October 2015 to calm the rating agencies.

READ: Gordhan’s Rubicon moment awaits

Johann Els, senior economist of Old Mutual, also believes “most of the deficit reduction will likely come from tax hikes since reducing government’s expenditure ceiling significantly seems challenging right now”.

Els says a likely 1% increase across the PIT-board with the exception of the lowest band, will raise an additional R10bn. “The most positive message the minister could send would be a VAT hike, although the probability of this is less than 50% given that we’re currently in an election cycle," he says.

Figures on how many taxpayers SA has and who actually pay the bulk of taxes differ, but Paul Joubert, senior researcher of the Solidarity Research Institute, found in 2013 that 84% of taxes in South Africa is paid by those earning more than R200 000 a year. Another study found that about 5% of the workforce in SA (or less than 1.75% of the total population) pay more than half of all tax.

In the beginning of last year Engel already talked about the beginnings of a tax revolt in SA (during an interview with Alec Hogg of Biznews). And it could now worsen.

Engel said: "When you’re talking about a tax revolt, that usually begins in several places. People become more resistant to paying taxes. They complain (like the toll roads).

 The fight against taxes increases, as you say, when revenue is misused.  Unfortunately, you are in an environment where the economy is down, revenue is constrained and misused, and there is a growing hostility to taxation.

"That’s when you start focusing on loophole closing because those are a small group of people rather than a large group of people. I think though that one of the big issues that should be discussed is that you can’t talk about tax and expenditure in isolation of each other.