Call for South Africa to overhaul its tax system, including a VAT hike

South Africa should review its tax system to fund reforms that promote economic growth and reduce inequality now that it has reached the limits of fiscal adjustments aimed at reducing budget deficits and bringing debt under control, the OECD has recommended. .

Africa’s most industrialized economy is grappling with mounting debt, which the government says is expected to peak at 75.1% of gross domestic product in fiscal 2023, and its interest bill is the fastest growing line item since 2011.

Both pose major risks to fiscal sustainability and have been compounded by the damage wrought by the coronavirus pandemic, years of overspending, mismanagement and corruption.

While putting public finances back on a more sustainable path is key to restoring confidence, the government should spend the money more efficiently and would benefit from a “less distortive” tax system, the OECD said in a published report. Thursday.

“Overall, tax rates are already high or comparable to OECD levels, but there is a wide range of tax provisions and exemptions that reduce effective tax rates significantly below tax rates. ‘legal taxation’.

According to the OECD, South Africa’s top 10% earners contribute nearly half of all income, and the richest 10% of its residents hold 85.6% of net wealth, which sees possibility for the tax system to contribute more to the reduction of inequalities.

tax the rich

More than a quarter century after the end of the apartheid system of governance that disadvantaged the black majority, South Africa ranks as the most unequal nation in the world.

While presidents from Nelson Mandela have expanded the welfare system and undertaken affirmative action policies to create a large black middle class and lift millions out of poverty, inequality continues to be exacerbated by inefficient spending in one of the poorest education systems in the world.

The country’s progressive personal income tax schedule is undermined by deductions that largely benefit high-income earners, the OECD said.

Increasing payroll taxes, cutting travel allowances and exercising stock options, cutting retiree assistance and cutting medical expense deductions could solve the problem, he said. he declared. South Africa should also broaden its inheritance tax base by reducing exemptions for life insurance, trusts and retirement savings, he said.

“Personal income tax reform must strike a balance between sharply reducing inequality and preserving work incentives for middle to high earners,” the OECD said.

According to OECD estimates, South Africa’s value added tax rate of 15% is relatively low and an increase of 2 percentage points could increase its contribution to revenue by around 1% of GDP.

The tax increase, which the government has only made twice since 1991, is unpopular within the ruling African National Congress because it is seen as hitting the country’s poorest people the hardest.

“To mitigate any potentially negative redistributive effects and to increase the political acceptability of further reform of the VAT rate, it is preferable that any increase in the standard VAT rate is accompanied by an increase in transfers to low-income households. and that efforts be increased to reach all low-income households,” the OECD said.

“If in future the social assistance allowance covering all unemployed people of working age is permanent, it will make it possible to tailor the assistance to the poor more closely when the VAT rate is increased.”

The so-called Social Distress Relief, or SDR, grant was first introduced in response to the pandemic and has since been extended until March 2023. It has added more than 10 million people to the net of social protection in a country where there are twice as many recipients of social assistance as taxpayers.

The corporate tax rate in South Africa has been lowered by 1 percentage point to 27% this year. This is still relatively high and there is room for further reduction if the tax base is broadened, the OECD said. Revenues from natural resource extraction could be increased and digital tax levies could be improved, he said.

The OECD tax recommendations come as South Africans grapple with a cost of living crisis and an aggressive cycle of rising interest rates. In October 2020, the National Treasury said recent tax increases had generated less revenue than expected and evidence suggested they could have significant negative effects on economic growth.

With the state wage bill accounting for about a third of government spending, future wage increases should be more fiscally sustainable and “tied to efficiency gains in the public sector or productivity growth at the government level.” economy-wide,” the OECD said.

Boosting productivity growth, which would include improving transport infrastructure, electricity generation capacity, telecommunications networks, reducing barriers to competition and expanding access to Higher education and quality health care are key to raising living standards, he added.

The government’s high exposure to state-owned enterprises, some of which continue to underperform despite changes in management, “represents a risk for debt sustainability and public finances”, according to the OECD.

He recommended the privatization of some companies and the establishment of a governance framework that protects companies from undue political interference and improves accounting, reporting, compliance and auditing standards.

As South Africa tries to tackle corruption in the public sector, its efforts are “too slow”, according to the OECD. “Corruption breeds mistrust, undermines democratic institutions and the rule of law, corrodes the social fabric and threatens sustainable economic development,” he said.

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