By how much will taxes have to increase to pay for a basic income grant?

Personal income tax (PIT), value-added tax (VAT) and corporate income tax (CIT) would have to increase by just under 5% to raise R50 billion, or by slightly more than 9% to raise R100bn, if all three taxes were harnessed to fund a basic income grant (BIG), according to a study by research and consultancy house Intellidex in July.

The research was published a week before the ANC’s national policy conference, where a wealth tax was proposed to fund a BIG (see below). The party first made such a proposal in 2017.

Intellidex said a 5% average increase in all three taxes to raise R50bn would see PIT increase by 1.2 percentage points at each tax bracket, CIT increasing to 29.5%, and VAT increasing by 0.75 percentage points.

The research house used R50bn and R100bn as the indicative costs of a BIG. It said these numbers were significantly smaller than what most proponents of a BIG hoped to spend and were, therefore, a conservative estimate of the costs.

Its modelling of the tax hikes required to fund a BIG was based on the tax revenues for the pre-Covid 2019/20 fiscal year.

Click here for a table that summarises Intellidex’s modelling of the tax increases and their implications.

It said most proposals for a BIG would cost between R60bn and R250bn, depending on the amount of the monthly payment and the percentage of the population that would meet the eligibility criteria.

“Though there is no fixed set of proposals onto which everyone who favours a BIG has signed up, in our estimation, most proponents are probably thinking about a grant costing something like R200bn a year, or about 3% of GDP,” Intellidex said.

ANC favours a wealth tax

Mmamoloko Kubayi, the chairperson of the ANC’s economic transformation sub-committee, told the Sunday Times that the ANC was opposed to increasing PIT or VAT to fund a BIG, because this would add a burden to already financially stressed households.

The publication quoted Kubayi as saying that the better option was a wealth tax that targeted the top 5% of high-net-worth individuals and estates with significant assets.

“BIG can be regarded as a mechanism to promote equity, and thus a wealth tax can be a mechanism through which revenues can be raised to fund a BIG,” read a proposal presented at the economic transformation sub-committee at the ANC’s national policy conference over the weekend.

The proposal said that work would have to be done to determine who fell into the super-wealthy category. “We must hasten to add that such a process is complex, as it requires a guideline for identifying who would be subject to a wealth tax, and the criteria for selection of these persons.”

Kubayi said grants should be conditional and linked to a form of work or a skills development programme.

“If it’s an able-bodied person, they [grants] must be linked to [some] sort of work and skills training. A person who signs for BIG must sign an agreement to say, I’m going to be linked to this skills centre. Should they fail to comply. they must fall off,” the Sunday Times quoted her as saying.

In the run-up to the ANC’s national conference, the party’s sub-committee on social transformation proposed that the social relief of distress (SRD) grant, which was introduced during the lockdown, becomes a BIG for everyone aged 18 to 59 who is “unable to support themselves”.

It appears that the sub-committee’s proposal excludes those who receive child-support, old-age and disability grants.

According to Intellidex’s report, paying the SRD grant of R350 a month to adults aged 19 to 59 without any employment (formal or informal) would cost about R73bn a year.

Wealth tax modelling

According to a 2021 report by the Institute for Economic Justice (IEJ), a tax of 1% on individuals whose net wealth is greater than R3.7 million (about 350 000 people), plus a tax of 3% on the value of assets above R27.3m (the top 0.1% of taxpayers – about 35 000 people) would raise R59bn a year.

Intellidex said the IEJ arrived at this estimate after assuming that the introduction of a wealth tax would lead to a 20% decline in share prices and that taxpayers would avoid/evade 30% of the taxes they should pay.

Intellidex said it was concerned about this proposal for the following reasons:

• Without assuming a bear market and without assuming that all South Africa’s wealthy will evade the tax, the tax liability will be the equivalent of R150bn a year, not R59bn. This is the equivalent of nearly R170 000 in additional annual taxes for every member of the top 1% of wealth holders.
• Assuming that the IEJ’s numbers are accurate, the effect would be the equivalent of adding 14 percentage points to the effective rate of PIT on a small group of highly mobile individuals.
• There are significant legal and administrative difficulties associated with implementing a wealth tax, such as determining which assets should qualify for taxation and which should not, how to assess their value, and how to apportion a wealth-holder’s debt to his or her taxed and untaxed assets.
• A wealth tax would create “enormous distortions” in investment decision-making as capital was shifted into asset classes that are not taxed or that are less easily taxed.

Raising the VAT rate is politically problematic

PIT, VAT and CIT account for almost 85% of all the government’s tax revenues.

If a BIG were funded by increasing PIT alone, PIT would have to increase by between 9% (to raise R50bn) and 19% (R100bn), Intellidex said.

VAT would have to increase by between 14% and 29%, which would mean an effective increase of about two percentage points from 15% to 17%, while CIT would have to increase by between 24% and 47%.

Compared to the other “major” taxes, increasing VAT would have the least impact on the country’s economic growth. But VAT was also less progressive than direct taxes, so most proponents of a BIG envisage financing it with almost anything but an increase in VAT.

As the experience of raising VAT to 15% in 2018 showed, an increase in the VAT rate would be exceptionally controversial politically.

Higher taxes ‘the only option’

In Intellidex’s view, raising taxes was the only way to fund a BIG (or even extend the SRD grant beyond the current year). It said cutting other expenditure was not a viable option, politically or technocratically, because there was no “free fat” to trim.

Financing a BIG by issuing more debt would be highly risky. The country’s ratio of debt to GDP has surged nearly three times between 2008 and 2022 to about 70%, which means debt servicing now require nearly 20% of revenue compared with less than 10% 12 years ago.

It said the tax hikes to fund a BIG would have to be broad based and would have to be paid by the middle and even the lower middle classes in order to be sustainable, given the country’s narrow tax base.

The report pointed out that an increase of, say, 10% in a tax rate does not result in a 10% increase in tax revenues. This is because the effect of increasing a tax rate does not only depend on the amount by which the rate rises, but also on the macroeconomic effects of the increased tax, particularly its impact on GDP growth, and behavioural responses by taxpayers, who may adapt their economic and commercial activities to minimise the effect of the higher tax on their after-tax income.

‘Public finances will be more unsustainable’

Intellidex said it was widely acknowledged (including by the government) that the country’s public finances were on an unsustainable trajectory.

Once that was accepted, the question of whether a BIG is affordable amounted to, “Will a BIG make South Africa’s public finances even more unsustainable?”

In its view, it was beyond doubt that a BIG of any meaningful size would make the country’s public finances even more unsustainable than they are now and, in the context of high interest rates and a steep yield curve, would likely slow economic growth.

Intellidex was “optimistic” that a BIG would reduce poverty, and, in general, that its effect on poverty would be proportional to its size.

But it said there was a critical proviso to this conclusion: a BIG will reduce poverty only to the extent that it is affordable and that its positive effects are not offset by any negative effect on the stability of South Africa’s public finances or on the pace of economic growth and job creation.

“Here, we are much less optimistic about a BIG. It is, in our view, entirely possible that the implementation of a BIG could induce so severe a set of second-round effects that its full effect will be to deepen poverty by making it harder for South Africa’s economy to grow.”