Our heavy tax burden

Nobody likes to see a few thousand rand in tax disappearing straight off their salary month after month. The tax deduction might equal the instalment on a car for most people or, at least, a few extra pizzas every month.

More alarming is that everybody pays thousands more in tax than what our salary slips show. The range of indirect taxes – value added tax, fuel levies and other duties – increase the tax rate on an average salary from an effective rate of around 14% to nearly 30%, depending on what one consider to be an average salary in a very diverse labour market. Salaries differ significantly in different towns, and even due to personal characteristics.

Different surveys by employment consultants, Stats SA and the Department of Labour give a wide range of average salaries in different industries from an average of R6 000 per month for an office assistant to R30 000 for a computer programmer. The most recent report on Stats SA’s quarterly employment survey puts the average salary in SA on R21 190 per month during the last quarter of 2018.

This tallies with what one would consider an average job in SA. Advertisements in newspapers and on the internet indicate that a qualified nurse, electrician or accountant with a bit of experience can expect to earn between R230 000 to R260 000 per annum. According to one employment agency’s website, Sars itself would pay its accountants and tax consultants between R22 000 and R24 000 per month.

A salary of around R23 000 per month would suffice to illustrate the effect of the impact of indirect taxes. The same argument will hold true for somebody who earns R4 000 per month and pays no income tax, but will pay tax of 15% on most of their income in the form of value added tax every time they open their wallet in a supermarket.

According to Sars’s tax deduction tables, an individual who earns R276 000 per annum (R23 000 per month) should pay R56 313 tax per year (nearly R4 700 per month), equal to a tax rate of a shade over 20%. In reality, it is less.

Total tax revenue as % of GDP

The primary rebate will decrease it to around 14% for individuals below 65 years and a bit of tax allowances with regards to retirement annuities and medical expenses would help to decrease the tax rate to around 11%. Good tax planning and a structured remuneration package could decrease the tax rate even more, but probably at the cost of lower cash earnings.

But no amount of tax planning can reduce the burden of indirect taxes. Everybody is aware of the increase in VAT from 14% to 15%, announced in the 2018 budget speech, but the effect of high levies on fuel and life’s sinful pleasures are even worse in terms of the rate of tax.

If our average salary earner owns a car and drives the average 30 000 kilometres per annum (based on Sars’s assumption of private use of a vehicle and guidelines in the second-hand car market), they will use about 3 000 litres of fuel per annum at some 10 litres per 100 kilometres. At R5.56 in tax per litre, they will pay a massive R16 890 in fuel tax every year.

The balance of our average guy’s salary can result in another R25 000 finding its way to Sars in the form of VAT, depending on how much an individual spends and saves and the products he buys.

A daily packet of (legal) cigarettes will contribute another R15.52 (R5 640 per annum) to government’s treasure chest and a few glasses of beer, wine and brandy can easily add another R3 000 per annum. Spirits are taxed at nearly R46 per bottle, while the sugar tax adds R2.80 to a two-litre Coke.

Adding a few hundred for property tax, but disregarding capital gains tax and refusing to pay e-tolls, will result in a total tax bill of around R84 000 per annum (R7 000 per month). This means anybody with an average job and average salary pays up to 30% of his income towards tax.

The argument holds true for people earning more as well. Firstly, SA’s progressive tax system taxes higher earners at a higher rate, while people with more money will spend more and drive more. They are also likely to pay more in property tax and a bit of capital gains tax from time to time.

However, it is not only the amount of tax or the effective tax rate when including indirect taxes that are making taxpayers unhappy, but rather the impression that we are not getting value for our money.

Government services, for the most part, do not come close to meeting expectations. Just about every government department admits that its service delivery is not up to standard, be it state hospitals, public transport, government schools, safety and security or maintenance of roads. The finances and service delivery in most municipalities are in disarray, while Eskom struggles to deliver uninterrupted electricity.

Read: The problems with Eskom load shedding plan

The inefficiency of government is akin to additional tax as taxpayers need to supplement government services, from extra English lessons to private schools, and expensive medical cover, a back-up generator and the services of a private security company. This “inefficiency tax” can even extend to higher life and short-term insurance premiums due to government’s failure to uphold law and order to an acceptable standard.

The level of tax and what taxpayers get for their taxes in terms of services, as well as the quality of these services, are important aspects that make people question our tax regime and raise concerns about tax compliance.

Johan Rossouw, economist at Vunani Securities, says most taxpayers probably think that they are paying too much tax, especially considering what we really receive for our tax money. “We probably don’t compare well with the rest of the world when comparing our tax rate with what we receive in services.”

Comparing tax rates between countries is complex due to huge differences in tax brackets and significant differences between statuary tax rates and effective tax rates. It is easy to refer to tax rates in extreme cases, such as Sweden, Denmark and Finland, which have maximum marginal income tax rates of around 55% and sales tax as high as 25%. But citizens receive good schooling and healthcare, without direct payment. There are also concerns whether their government spending is sustainable.

Oil-rich countries in the Middle East are on the other end of the scale, with excellent services at a tax rate of less than 2% and seemingly no constraints on state budgets.

In SA, taxpayers are increasingly of the view that we are already paying too much tax and that we are close to the point where any increase in taxes will result in more tax evasion of a total refusal to pay similar to the e-tolls saga.

“I don’t believe we are at this point yet, but we are probably high on the curve,” says Rossouw. He refers to the so-called Laffer curve which shows how government revenue increases as tax rates increase, but only up to a certain point. Thereafter tax revenue will decrease as there is little incentive for people to work harder if government takes most of the extra income, or simply an increase in tax evasion.

“A big concern in SA is the belief that our taxes are not going towards what it is meant for. The general view is that too much disappears due to corruption, theft and inefficiency,” says Rossouw.

Hugo Pienaar, economist at the Bureau for Economic Research at the University of Stellenbosch, says the tipping point of tax collection is not a specific figure or an absolute percentage. “Some people might already be inclined to try and evade tax. It is one of the tax authorities’ current challenges – to restore taxpayer confidence.

“It is interesting to note that government’s tax income as percentage of the size of the economy declined during the last few years, despite the introduction of new taxes to the tune of R92 billion since 2016,” says Pienaar. “The decrease in tax revenue versus the GDP could be the result of lower economic growth or inefficiency in tax collections, which might include a proportion of tax fatigue.”

Rossouw and Pienaar both mention that government’s ability to ensure law and order, policy certainty, acceptable service delivery and proper strategic planning with regards to economic and business issues are necessary to rebuild a good relationship with taxpayers to ensure that people feel that the heavy tax burden is fair and reasonable.