Tax relief for middle class, but not for the rich

Economic students’ old nemesis John Maynard Keynes would have been pleased with Finance Minister Tito Mboweni’s 2020/2021 budget for effectively lowering taxes to stimulate the pedestrian economy.

The much-studied Keynesian model predicts an upswing in household expenditure if government cuts taxes, with higher tax revenues down the line when economic activity picks up.

The tax proposals that decreased personal tax, kept value-added tax (Vat) at 15% and raised the possibility of reducing corporate taxes came as a surprise to many commentators who predicted hefty increases in taxes to plug gaping holes in the government’s budget.

Read: Tax reprieve for South Africans in 2020

Deviating from his written script, Mboweni mentioned early in his speech that there would be no major tax increases. Referring to forecasts that National Treasury would have had to increase Vat, he quipped: “I don’t know where they got that from.”

R14bn boost

The actual changes to tax tables delivered a pleasing reduction in taxes that is set to effectively inject R14 billion into the economy.

Johann Els, chief economist of Old Mutual Investments Group, points out that tax brackets were adjusted by more than the inflation rate. They were adjusted by 5.2% compared to an expected inflation rate of 4.4% for 2020.

“This provides for total individual income tax relief of R2 billion,” says Els. This compares to a potential extra tax revenue of R12 billion if Treasury effected no changes to tax tables as predicted by some.

Els says Treasury officials admitted to participants in a closed presentation preceding the budget speech that they discussed various additional tax increases, but decided against any given the weak economy.

Treasury is apparently relying on “voluntary” taxes on alcohol, tobacco products and similar excise duties to make up the R2 billion handed to consumers, and strengthening the South African Revenue Service (Sars) to better enforce tax compliance.

Effect of tax relief on tax revenue

Instead of draining R12 billion out of the economy, the tax relief injects R2 billion extra into consumers’ wallets.

Hopefully, they will spend most of it on pizza and beer.

Selling more pizza will keep restaurant owners in business and secure the employment of their staff, while spending money to buy ingredients will keep the whole supply chain ticking over and secure more jobs. A few extra beers will limit job losses at SA Breweries while the extra 8c in tax on every can will go towards balancing the books.

In his address to parliament, Mboweni mentioned three examples of taxpayers who will pay less tax.

“Hard-working taxpayers who earn on average R265 000 a year will see their taxes reduced by over R1 500 per year,” he said. This is equal to an extra R125 per month on the monthly salary of around R22 000.

He mentioned that a teacher who earns R460 000 per year will pay R3 400 less tax in the coming tax year. “Someone earning R10 000 a month will pay 10% less in tax,” according to Mboweni.

However, a closer look at the new tax brackets show that tax relief was reserved only for people earning up to R500 000 per annum.

The statutory tax rate in the very next tax bracket – R500 000 to R750 000 per annum – remains unchanged at 16.1%, and tax relief would be limited.

The new tax table indicates that high-income earners will in part subsidise the larger relief given to those in lower income brackets.

The marginal tax rate for people earning more than R1.5 million per annum increased from 26.8% to 27.4%.

Mboweni said as much, referring to the progressive tax system in which the rich are taxed more than the poor.

Tax tables 2020/2021

The changes in excise duties will probably also hit the rich harder than the middle class.

Two examples stand out:

• Excise duty on sparkling wine increases by 61c per bottle versus an increase of only 14c on other wine; and
• The duty on a 23g cigar increases by R6.73, while the duty on the same amount of pipe and cigarette tobacco increases by only 40c.

Brendan Gace, head of Anchor Private Clients, says a family in which one partner earns R50 000 per month and the other R35 000 will be taking home around R600 more per month this year.

“With middle class taxpayers in SA finding themselves rather stretched, the 2020 budget has provided some welcome relief,” he says. “Many homes have been experiencing above-inflation increases in certain big expense items such as school fees, electricity bills and medical aid costs.”

Furthermore, with some good tax planning they will be better off, says Gace. This would include the use of other deductions such as contributions to pension funds, retirement annuities and interest exemptions, as well as medical tax credits.

“The big caveat is that they will have to behave, as sin taxes on cigarettes and alcohol were increased.”

He cautions that the real danger for this middle class couple is the risk of retrenchment in a low growth economy. “The budget speech made reference to low future growth for the next few years and deep cuts in the public sector wage bill. With tough times possibly still ahead, keeping a kitty aside for such rainy day will be a very good idea,” says Gace.

A little of the couple’s tax relief is eroded by the increase of 25c in excise duty on fuel, increasing their total monthly petrol bill by around R100, depending on how much they drive and what cars they own.