COSATU Proposals to the NEDLAC Public Finance and Monetary Chamber on Increasing The Progressivity Of Elements Of The Tax System 22 September 1999

Table of Contents

Executive Summary Introduction The current situation Changes in the composition of revenue The incidence of the VAT burden Changes in ad valorem excise and customs duties Expenditure patterns Company tax International comparisons Tax levels

VAT Income tax Proposals Multiple VAT rating VAT zero-rating Luxury taxes Corporate taxation Tax on pension/provident funds Capital gains tax Overall restructuring of the tax system Appendix A

 

Executive Summary

This submission arises from Labour’s commitment in the Chamber to table proposals on restructuring of the tax system. The key proposals raised are as follows:

• The introduction of multiple VAT rating.
• Increasing the number of basic goods which are VAT zero-rated.
• Subjecting certain luxury goods to a higher rate of VAT.
• Agreement on a minimum proportion of total revenue which should be contributed by companies.
• Increasing the rates of company tax and STC.
• The principle of a minimum effective tax on companies.
• Eliminating tax avoidance and evasion.
• Implementation of the agreement on "top-ups" in pension/provident funds.
• Introduction of a capital gains tax.
• Agreeing on an appropriate band for the revenue : GDP ratio.
• The introduction of a solidarity tax to finance development.
• The introduction of a land tax.
• Increasing the rate of income tax at higher income levels.
• Overall restructuring of the tax system.
   

Introduction

Fiscal policy is one of the key tools at government’s disposal for redistributing resources in a way that empowers the poor. Since 1994, the government has made some important advances in this respect. However, significant elements of the tax system remain regressive. The proposals tabled by labour here focus on the revenue side of fiscal policy. They are intended to enhance the progressivity of South Africa’s tax system in a way that is equitable and efficient.

We begin by analysing the current situation, specifically in terms of where the burden of taxation currently falls. International comparisons are also examined. We then table specific proposals in the following areas:

• Multiple VAT rating
• Increased zero-rating of VAT
• Recovering more revenue on luxury goods
• Corporate taxation
• Introducing a capital gains tax
• Tax on pension/provident funds
• Overall restructuring of the tax system.
   

The current situation

South Africa’s tax structure currently has significant regressive elements. The tax structure is regressive at lower income levels for income taxes, consumption taxes, and the overall tax structure. Although the income tax structure is progressive for certain income bands, the degree of progressivity falls and becomes neutral for the highest income levels (1). Furthermore, even the partial progressivity of income taxes is of no benefit to those who are below the income tax threshold. The following sections analyse the current situation in terms of shifts in the composition of tax revenue; where the burden of VAT falls; changes in ad valorem excise and customs duties; expenditure patterns; and effective company tax rates.
 

3.1 Changes in the composition of revenue

The 1990’s have seen a continuation of the trend of shifting

the tax burden away from companies and onto individuals. The following table shows the changing composition of tax revenue over this period. Until 1980 revenue from gold mines and other companies was one and a half times that from individuals. This contrasts with the current situation of individuals paying four times as much as gold mines and other companies! Individuals, through income tax and consumption taxes, now bear two thirds of the total tax burden. The tax system has become increasingly regressive and companies have contributed less and less to the fiscus.

Table 1: Shifting Composition of tax revenue 1976 - 99

Percentage Composition of Tax Revenue 1976 - 99
	1976	1980	1985	1990	1995	1999/2000
Gold Mines	8.5%	11.4%	6.8%	1.7%	0.4%	0.1%
Other Companies	26.5%	18.0%	16.1%	17.7%	12.1%	11.1%
Individual	24.7%	18.0%	31.1%	30.4%	40.9%	42.2%
Sales Tax	0.0%	12.2%	25.0%	27.0%	26.4%	24.1%
Customs & Excise	21.1%	12.7%	8.1%	14.4%	17.9%	8.0%
Other	19.3%	27.7%	12.9%	8.9%	2.2%	14.5%
Total	100%	100%	100%	100%	100%	100%

Source, The First Women's Budget, 1999 Budget Review

Major improvements are being made by the South African Revenue Service in tax collection, which saw R 4.6 billion more in personal and individual taxes being collected than was expected (R76.4 billion up from R71.8 billion). Despite this, the estimated revenue from companies was R1.2 billion lower than previously estimated (R20.0 billion as opposed to R21.2 billion), supposedly reflecting a downward revision of anticipated company profits following the weaker GDP growth. (2)

The 99/2000 budget year announced a reduction in the company tax applicable to undistributed profits on non-mining companies from 35 to 30%. The Secondary Tax on Companies of 12.5% remains unchanged. It is expected that the drop in company tax will amount to a revenue loss of R2.5 billion.
 

3.2 The incidence of the VAT burden

It is widely accepted that VAT as a consumption tax is regressive. It affects the lower income earners more severely as the proportion of their income paid in tax is much higher relatively speaking than that of higher income earners. Consequently increased reliance on this tax has implications for economic justice and poverty. A uniform VAT structure with a narrow range of exemptions ignores equity, or more specifically, income distributional issues. This is particularly anomalous in South Africa in the light of the extreme inequality.

The poorest fifth of the population spend 61% of their consumption expenditure on goods subject to VAT, while the wealthiest fifth spend only 43% of their consumption expenditure on these types of goods. (3) A study by Fourie and Owen examining the VAT burdens for nine income groups based on a rate of 14% and the 1993 selection of zero-rated goods shows the following patterns:

Table 2: VAT burden by income group

Average income of income group	VAT burden with zero-rates	VAT burden without zero-rates
R7 215 (4)	7.64%	9.25%
R265 504 (5)	4.26%	4.53%

Even with zero-rating, it is clear that VAT comprises a far higher burden for low-income households than for high income ones. While the current zero-rating saves the wealthy minimally as a proportion of their income, it makes a far bigger difference to the poor. These figures also show that zero rating is effective in helping to reduce the regressivity of VAT. Zero-rating of additional items would further mitigate this regressivity.

VAT on basic necessities is particularly anomalous when for example statistics on nutritional needs of children between 6 and 71 months show that 9% are underweight and 22% are stunted. (6) A report commissioned by COSATU indicated that 13.8 million people in the lowest two quintiles are not covered by any form of social assistance or social security from the state. (7) The absence of an effective social security system, exacerbates the regressivity of VAT and strengthens the case for zero rating VAT on many basic goods and services.
 

3.3 Changes in ad valorem excise and customs duties

There has been a significant reduction in recent years in the contribution of customs and excise taxes to the total government tax revenue. While excise duties on so-called sin goods such as alcohol and tobacco have increased, ad valorem excise and customs duties have in the most part decreased, even on socially undesirable goods such as firearms. (8)

Appendix A indicates the general decline in ad valorem excise and customs duties from 1996 to 1999 on "luxury goods". While 10% duties have been introduced on some goods which were not previously subject to these taxes, in most cases taxes were cut from 37.5% to 10%. This means that these luxuries have been taxed less and less, hence making the overall tax structure more regressive. The potential of ad valorem excise duties on luxury or non essential goods to impart some degree of progressivity into consumption taxes has thus been significantly reduced. This strengthens the need for a luxury rate of VAT.

Thus while it may have been argued in the past that ad valorem excise duties did impart some progressivity into the consumption tax system, this ability has been substantially reduced.

One of the reasons why governments impose these excises is to enhance the equity of the tax systems and/or to maintain a single rate VAT system. This was the logic used by the Katz Commission in support of the maintenance of ad valorem excise duties at the rates charged then. Furthermore, the commission recommended that the inclusion of luxury motor vehicles in the tax base should be investigated.

The scope to increase ad valorem excise duties is constrained by the requirement that the rate of duty has to be the same for ad valorem customs and ad valorem excise as per GATT / WTO agreement. Thus the scope to increase the progressivity of consumption taxes through ad valorem duties has been significantly curtailed.
 

3.4 Expenditure patterns

An analysis of the impact of VAT and zero rating has to take into account the different spending patterns of the different income groups. Lower income groups spend a larger proportion of their incomes on basic goods and consumables such as food, drinks, tobacco, clothing and footwear, energy sources and furniture. As is shown in the following table spending patterns differ significantly between low and high income earners. Food represents the single largest item for poor and low income households, taking up more than 50 percent of total income. For high income households this declines to approximately 10 percent of total income. After housing, fuel is the next biggest expenditure item for low income households, representing 5.26% of income followed closely by clothing.

Table 3: Household expenditure patterns across various income groups

	Africans from lowest bracket	All population groups					Whites from highest bracket
Household expenditure	R0-R6867	R0-R6867	R6868-R12659	R12660-R23939	R23940-R52799	>R52800	>R52800
Average income (9)	R 4868	R4884	R9361	R16053	R31717	R104913	R117633
Items as % income:
Food	50.90%	50.80%	41.21%	33.02%	24.31%	11.57%	10.29%
Drinks	2.28%	2.33%	2.57%	2.60%	2.24%	1.52%	1.53%
Tobacco	2.28%	2.33%	1.95%	1.78%	1.26%	0.60%	0.67%
Clothing	5.16%	5.02%	5.69%	5.92%	5.17%	2.93%	2.22%
Footwear	1.87%	1.82%	2.04%	2.20%	1.88%	0.90%	0.60%
Housing	12.26%	13.72%	12.18%	12.83%	15.64%	17.09%	19.75%
Fuel & power	5.26%	5.10%	2.76%	1.50%	0.59%	0.13%	0.07%
Furniture & equipment	2.53%	2.44%	3.98%	5.53%	6.04%	3.45%	2.05%
Household operation	3.94%	3.93%	3.45%	3.10%	2.38%	1.19%	0.97%
Servants	0.23%	0.23%	0.28%	0.52%	1.03%	2.02%	2.34%
Medical services & requirements	0.60%	0.63%	1.19%	2.22%	4.76%	4.46%	4.82%
Transport	2.90%	2.78%	4.22%	6.33%	8.00%	12.14%	13.00%
Communications	0.60%	0.78%	1.25%	1.90%	2.70%	2.49%	2.74%
Recreation, sport, etc.	0.39%	0.43%	0.61%	0.97%	1.32%	2.08%	2.40%
Reading matter	0.04%	0.04%	0.18%	0.35%	0.52%	0.54%	0.49%
Education	1.01%	0.96%	1.07%	1.41%	1.97%	2.06%	1.91%
Personal care	3.10%	3.11%	3.16%	3.34%	3.25%	2.03%	1.82%
Restaurants, bars, etc.	0.16%	0.16%	0.27%	0.38%	0.63%	0.96%	1.10%
Holidays (accommodation, transport)	0.29%	0.27%	0.24%	0.30%	0.24%	0.31%	0.36%
Other	2.65%	2.60%	3.69%	5.60%	8.42%	13.40	14.82%

Source: Statistics South Africa "1995 Income and expenditure of households"

3.5 Company tax

The final aspect of our analysis of the South African situation relates to company tax. The huge gap between nominal and effective taxation rates has been a major contributor to the fall in company tax. According to the 1998 Finance Week survey of South Africa’s 200 top companies (which was conducted before the recent reduction from 35% to 30%), half of these companies pay tax rates under 29%. The survey also reports rates of 15% and 16% paid by some of these large corporations, many of whom are simultaneously paying large dividends to their shareholders! Effective tax rates also vary considerably between sectors. This largely depends on the way industry is structured and the amount of capital used. In 1993 it was estimated that effective rates for the banking sector were as low as 10%. (10) It is clear that sections of South African business are not pulling their weight in helping finance the country’s socio-economic development.

The corporate tax system continues to contribute to a capital intensive economic structure which is one of the causes of high unemployment. The Katz Commission interim report identifies tax distortions which have lowered the cost of capital and made labour relatively more expensive. These included skewed depreciation allowances, investment allowances, payroll levies, and registration fees. The low rates of company taxes contribute to the relative attractiveness of capital over labour, particularly since the weight of the tax structure falls on labour income and consumption. (11)

Further relief has been provided to companies through the reduction in the Secondary Tax on companies (STC). The STC was introduced to induce companies to reinvest profits in the expansion of productive capacity. Indeed, in the 1993 Budget Speech, the Minister of Finance motivated the introduction of STC as follows:

"It should prove an important incentive for the new and fast growing company: the more a company exploits investment opportunities and finances itself, the lower its tax rate will be. Such investment is not only important from a job creation perspective but can also serve to stimulate domestic demand".

The corporate sector responded by issuing scrip rather than paying dividends. Then they expressed concern to the Ministry of Finance about the 'dilution of ownership' that this resulted in! The STC was subsequently halved from 25% to 12.5%.

The corporate tax system continues to contribute to a capital intensive economic structure which is one of the causes of high unemployment. The Katz Commission interim report identifies tax distortions which have lowered the cost of capital and made labour relatively more expensive. These included skewed depreciation allowances, investment allowances, payroll levies, an registration fees. The low rates of company taxes contribute to the relative attractiveness of capital over labour, particularly since the weight of the tax structure falls on labour income and consumption. (12)
 

International comparisons

4.1 Tax levels

South Africa’s revenue : GDP ratio is very low as compared to developed countries and low to moderate as compared to developing countries. South Africa’s ratio is about four percentage points lower than the average for countries with similar income levels. Econometric studies that control for individual country characteristics have found South Africa’s rate to be significantly less than that which would be predicted given the country’s economic profile. (13) The recent upward revisions of GDP measurements would further lower reduce South Africa’s revenue : GDP ratio. Tax effort analysis suggests that South Africa could mobilise an additional twenty-five billion Rand per year without undermining international competitiveness. (14) It is important to note that South Africa is not only under-taxed, but that (as discussed above) the composition of tax revenue is inappropriate and inequitable.
 

4.2 VAT

In order to deal with the regressive nature of VAT many countries have either made use of exemptions, zero rating of certain goods or use multiple rates, i.e. a number of lower rates, a standard rate and a higher rate for luxury goods. Canada, for example, accompanied the introduction of VAT with certain exemptions, a preferential rate for housing and making use of credits. The introduction of "refundable tax credits" based on family income (larger credits for lower income levels) was found to be the most successful mechanism at reducing its regressivity.

Distinguishing between product types is widely practiced. Outside South Africa, at least 10 other countries zero rate (basic) foodstuffs. These include Belize, Canada, Ireland, Jamaica, Kenya, Poland, Romania, Trinidad and Tobago and the United Kingdom. Another commonly used practice is either to exempt (basic) foodstuffs or apply lower-than-standard rates. The exemption approach is found in 50 mainly developing countries, whilst 26, mainly industrialized countries apply lower-than-standard rates on basic items.

Although a single, uniform rate is widely advocated in the tax literature, only 18 countries apply the same rate to all taxable goods and services. (15)

From the following table it is clear than many countries have multi-tiered rates applicable to different types of goods and different classifications within broad categories. Within Western Europe, not only do most countries have a lower and standard rate, but have more than one lower rate (up to five lower rates). Rather than being the exception to the rule it seems that a large proportion of countries have a multi-tiered VAT system. Furthermore, the table indicated that not only the most advanced economies have the capacity to administer multi VAT rates. In fact, countries with less developed economies and infrastructures than South Africa are able to collect VAT at several levels for different types of goods.

Table 4: VAT rates across countries

Region/Country	Lower rates %	Standard rate %	Higher rate %
Western Europe
Austria	10; 12	20
Belgium	0; 1; 6; 12	21
Denmark	0	25
Finland	0; 5; 6; 12; 17	22
France	2.1; 5.5	20.6
Germany	7	15
Greece	4; 8	18
Holland	0; 6	17.5
Italy	0; 4; 10; 16	19
Luxembourg	3; 6; 12	15
Portugal	5; 12	17
Republic of Ireland	0; 3.3; 12.5	21
Switzerland	0; 2; 3	6.5
United Kingdom	0; 8	17.5
Asia
China	0; 6; 13	17
Indonesia	0; 5	10	15
Japan	0	5
Korea	0	10
Singapore	0; 1	5	25
Australasia
New Zealand	0	12.5
Africa & Middle East
Algeria	7; 13	21
Israel	0	17
Ivory Coast	0; 11.11	20
Kenya	5	15	25
Malawi	0	20
Nigeria	-	5
Turkey	0; 1	15	40
Zambia	0	17.5
South Africa	0	14
South America
Argentina	-	21	27
Brazil	7; 12	18	25
Mexico	0; 10	15
North America
Canada	0	7

Source: Delloitte and Touch (1997) "VAT Handbook".

In most cases, Zero, typically relates to exports, and to basic food items as well as clothing in some instances.
 

4.3 Income tax

The last international comparison we refer to here is in terms of maximum marginal individual tax rates. The following data from a sample of countries indicates that South Africa’s top rate of 45% is not high by international standards: (16)

Denmark	61%
Netherlands	60%
France	56.8%
Spain	56%
Sweden	56%
Belgium	55%
Germany	53%
South Africa	45%.

Proposals

5.1 Multiple VAT rating

As seen earlier in the comparison of VAT structures internationally, multiple VAT rates are common in both developing and developed countries, with those in the available data having an average of three levels of VAT. Differential VAT rates are particularly appropriate for South Africa given the high levels of inequality.

Due to South Africa's vast levels of income inequality, where the wealthiest 10% account for 40% of household income and the poorest 10% accrue less than 1% of total household income, there is a strong argument for multi-tiered VAT rates. A multi-tiered VAT system could incorporate distributional considerations in addition to the usual efficiency concerns.

Labour proposes the institutionalisation of a structure of progressivity in VAT through multiple rates. We propose an increase from our current two-tiered VAT structure to more tiers, including zero-rated, standard, and luxury goods. Our specific proposals on zero-rating and luxury goods are set out below.
 

5.2 VAT zero-rating

The RDP committed to VAT zero-rating, as did the 1999 elections manifesto of the ANC which states clearly that "we are committed to progressive taxation, that lightens the tax burden on most middle income and poor families. There will be special tax exemption on those basic goods which poor families rely upon for survival."

As discussed above, VAT is a highly regressive tax and has an adverse effect on income distribution. To attempt to counter this and ensure that the meeting of basic needs by the poor is more affordable, a number of goods are already zero-rated by government. (17) Labour proposes that additional items which meet basic needs be included in the list of zero-rated goods.

The actual choice of additional goods to be zero-rated should be informed by current expenditure patterns (see above analysis), combined with a prioritisation of goods which can substantially contribute to improved social welfare of the poor. Revenue and efficiency considerations also need to be borne in mind.

In general, commodities with a high value would be a relatively low priority for zero-rating from a revenue point of view, while those with high impact on equity and the standard of living of the poor would be a relatively high priority for zero-rating from a welfare point of view. The health impact of goods – both positive and negative – would also influence the choice of items for further VAT zero-rating. For example, although lower income groups spend a greater proportion of their income on tobacco than do the higher income groups, negative health effects would rule out zero-rating it.

As a rule of thumb, exemptions will represent a larger share of poor households’ total expenditures than for the general population if the income elasticity on the good is below one. (18) Goods which have an income elasticity less than one in South Africa include maize, bread, cereal, potatoes, beans, fish, milk, fruit and vegetables, oils, sugar, and kerosene. The poor would tend to benefit proportionately more from zero-rating of these goods than would the wealthy.

Using the weighted equity gain ratios cited by the Katz Commission (19) suggests the following goods as prime candidates for zero-rating: paraffin, bread flour, white sugar, matches, candles, coal, coal stoves, and white bread.

Paraffin is the single clearest candidate for VAT zero rating. According to calculations of the Katz Commission, the gain per annum to the poorest category of households would be over 15 times the gain to the wealthiest category of households, in absolute terms. The weighted equity gain ratio for paraffin is about 13 times that of the next highest ranked item, mealie meal. Furthermore, the projected revenue loss to the fiscus from zero-rating paraffin would be considerably less than the loss from many of the items currently zero-rated. (20) Given the general difficulties of effectively targeting the real poor in poverty relief measures, zero-rating of paraffin represents an ideal opportunity for accurate targeting of those most in need. Zero-rating paraffin would of course not be sufficient, however, as it does not directly address the nutritional and other basic needs of the poor.

Over the counter drugs, generic drugs, and items of the government’s essential drugs list which are charged for should also be considered for zero-rating. School clothes and other education-related goods should also be included.

In addition, serious consideration should be given to zero rating domestic electricity consumption. Electricity consumption varies according to household income, with low income households consuming less than wealthy households. Consequently, zero rating of a certain amount of electricity and taxing subsequent consumption at a higher rate would be an effective way of targeting the poor. (21) In addition, zero VAT rates could also be extended to energy saving appliances, e.g. fluorescent lighting which consumes approximately one fifth of the electricity used by ordinary light bulbs. These policies would also have positive spin offs for the environment. A similar rationale could be applied to water, sewerage, and refuse removal.

Identification of additional goods for zero-rating should also take account of equity considerations amongst the poor. Selection should be biased towards goods which are disproportionately consumed by women and by the rural poor.

So in summary, the actual selection of goods for zero-rating should be informed by the following criteria:

• Their relative importance in the budget of the poor (and particularly of women and the rural poor) as opposed to the budget of the wealthy
• The likely effect of a price change on consumption of the good
• The effects of increased consumption on the welfare of the poor
• Revenue implications of zero-rating the good.

In terms of process, labour proposes that the NEDLAC Public Finance and Monetary Chamber reach agreement on the principle of zero-rating additional goods. A task force of the Chamber should make a concrete recommendation as to which specific goods should be zero-rated. Our understanding is that the Department of Finance is about to undertake a periodic review into which goods should be zero-rated. The NEDLAC agreement should be incorporated in the Department of Finance’s review. Final agreement should be reached in time for implementation in the 2000/2001 budget.
 

5.3 Luxury taxes

The increase in the number of goods to be zero-rated would obviously have revenue-loss implications. Labour proposes the introduction of higher VAT rates on luxury goods to raise compensating revenue in a redistributional way.

Certain goods tend to be mainly or almost exclusively consumed by the upper income brackets. Raising more income from these goods should raise enough revenue to compensate for VAT zero-rating on basic goods. Furthermore, such goods generally have above-average import ratio. Any suppressed demand from luxury taxes would thus probably not have particularly detrimental effects on the domestic economy, and would actually assist in relieving balance of payments pressures. Where such goods are produced domestically, their production tends to be relatively labour intensive hence minimising potential negative employment effects.

Identification of goods qualifying for luxury taxes should consider the proportion of income spent on the good for different income groups. It is proposed that two lists of goods be agreed upon: those which prima facie qualify for a luxury tax; and those which qualify for a luxury tax above a certain price threshold. The former list could include goods such as photographic plates and film, cameras, video cameras and recorders, decoders, satellite dishes, CD’s, furs, binoculars, lawn trimmers, air conditioners, cordless telephone sets, cellular phones, caravans, yachts and other water leisure equipment, dishwashers, tumble dryers, microwaves, and certain other electric kitchen appliances.

The second list of items which are consumed by different income brackets, but which could be classified as luxury goods above a certain price. This could include cars, motorcycles, fridges, freezers, stoves, radios, TVs, watches, jewelry, sunglasses, cosmetics, and furniture. For each good included in the latter list, a threshold would be set (and price-adjusted on an annual basis) above which the good would be classified as a luxury and subjected to a higher VAT rate. This would ensure that for example basic white goods purchased by the middle class are not subject to the luxury tax. Such a system is already in place in other countries (for example in the United States a car costing over $30 000 is subject to an additional 10% tax on the difference between its price and this threshold).

The efficiency of tax collection should also be a consideration. It would be undesirable to have a system which entails excessive administrative costs. From this point of view it may be preferable to have fewer items subject to luxury tax at a higher rate, rather than a high number of items at a lower rate. We also recommend that a minimum floor (an absolute amount) applies below which no luxury taxes are levied.

As with the zero-rating of additional goods, labour proposes that the Chamber agrees on the principle of subjecting certain goods to a luxury VAT rate and that a task team of the Chamber, operating within a tightly defined timeframe, concretises the actual list(s) of items. This process should be finalised in time for the inclusion of these taxes in the 1999/2000 budget.

The combination of increased VAT zero-rating and increased VAT on luxury goods, as proposed above, should mitigate the regressive burden of VAT and should aim at making VAT progressive or at least distributionally neutral.
 

5.4 Corporate taxation

As discussed earlier, the contribution of companies to total revenue has fallen dramatically over a long period of time. This trend continued with the last budget cutting the company tax applicable to undistributed profits from 35% to 30%, a change expected to lead to a loss to the fiscus of R2.5 billion. (22) It should be noted that the period since then has not seen an upsurge in productive investment, but instead there has been a dramatic loss of jobs. The Secondary Tax on companies, originally introduced at a level of 25% with the intention of encouraging companies to invest profits in productive investments rather than in dividends, now sits at just 12.5%. It is worth noting that the stagnation in private sector investment occurred in a period where the corporate share of taxation declined.

NEDLAC should reach a consensus on the need to raise more resources, badly needed by socio-economic development, from the corporate sector. Labour has four specific proposals in this regard.

• We need to agree on the minimum proportion of total revenue which should be contributed by companies. This is important in relieving the burden of individual taxation. We should aim for a target of at least a quarter of total revenue being raised from companies. Once this principle is agreed upon, specific mechanisms can be found for raising this revenue. These mechanisms could include the following three proposals.

• Increasing the rate of company tax and STC. The current company tax rate of 30% is low both by international and historical standards. This should be reviewed and brought in line with the targets discussed in the above bullet point. The level of STC, as well as other taxes which serve to discourage destructive speculation, should be assessed in the context of the extent to which gross domestic fixed investment is taking place.

• Agreeing on the principle of a minimum effective tax on companies (MTC) which should constitute the floor of any company’s contribution. The figures referred to earlier indicated the extremely low rates of effective taxation paid by many companies. A MTC would ensure a basic effective rate of taxation, irrespective of how many allowances and exemptions companies qualify for or what sophisticated mechanisms they can use to reduce their tax burden. (23) Possible mechanisms for implementing this include a minimum tax based on company profits, the American model of taxing excessive tax preferences, or a minimum tax based on dividends declared.

This approach of a minimum tax on companies has also been advocated in the South African context. The Margo Commission of Inquiry into South Africa’s tax structure recommended that "if the remaining incentives and concessions prove difficult to remove from the tax system, a simplified form of minimum taxation for companies could be considered for South Africa". In 1990, Inland Revenue also recommended consideration of a MTC.

• Eliminating tax avoidance and evasion. Recent press reports have indicated that about a third of all companies in South Africa are not paying tax at all. Despite commitments which have been made to close the gap between nominal and effective tax rates, substantial loopholes still exist and are being exploited by businesses in a way that erodes the fiscus. Further measures should be implemented to close these loopholes. Furthermore, there should be a crackdown on businesses which evade tax as they are responsible for undermining the ability of the state to meet socio-economic needs.

In addition to the above four measures for increasing revenue from corporate taxation, there should be consideration of the merits and disadvantages in introducing progressivity in the corporate tax system based on enterprise size (this could be measured in terms of a range of criteria, including turnover and asset base). This would constitute a reverse of the current situation where tax burden tends to be inversely related to company size. According to the Katz Commission there is considerable evidence to suggest that the compliance burden of taxation falls disproportionately on small enterprises. Small businesses either do not have the necessary expertise to complete tax returns and have to rely on expensive professional assistance or on their own efforts. Those who are unable to afford experts are often not aware of legitimate deductions.

The Ntsika Small Business Review has also made useful recommendations around changes in the tax system which would be conducive for SMME growth. However, such measures, if implemented in isolation, would have a negative effect on aggregate corporate taxation. An overall restructuring of corporate tax rates such that larger corporations pay higher rates of tax could be one way of addressing this. This should obviously be effected in a manner which does not have adverse unintended consequences such as allowing loopholes for arbitrage or creating incentives for small business fronts.

Furthermore, serious consideration should be given to the way tax incentives influence investment decisions and favor one type of production over another. Any incentives which encourage capital intensive production techniques and the substitution of capital for labour need to be reviewed.
 

5.5 Tax on pension/provident funds

Traditionally the private retirement industry in South Africa was largely used by the wealthy as a means of tax arbitrage. Taxing the trading income of retirement funds is one way to deal with this problem. Another reason for the introduction of tax on pension funds was to equalize the treatment between provident and pension funds. However the taxation of the retirement industry impacts on various income groups differently. The Smith Committee proposed the "top-up" as an incentive to get fund members to preserve their savings. The "top-up" system (as recommended by the Smith Committee) would compensate for the effect of taxation on low income earners in retirement funds. When taxation of pension funds was introduced, it as agreed with the then Deputy Minister of Finance that this was conditional on the top-up system being implemented. The existing agreement in this regard should be implemented without further delay.
 

5.6 Capital gains tax

Labour reiterates its proposal for the introduction of a capital gains tax. The absence of this tax at present means that a huge source of income for the already wealthy is untaxed, and a potential source of revenue is thus untapped. There are also adverse distortionary implications as people try to use this loophole to minimise tax. A capital gains tax would eliminate these distortions, improve the overall progressivity of the tax system, and raise more revenue for the fiscus. This tax should be carefully structured to avoid opportunities for tax avoidance.

We propose that the Chamber reaches agreement on the principle of a capital gains tax.

5.7 Overall restructuring of the tax system

The South African Revenue Service has, over the past 5 years, made significant progress in making South Africa's tax system more transparent. There have been considerable efficiency gains in terms of income tax collection. Measures have been taken to stem corporate tax evasion and avoidance.

The proposals raised in this submission are geared towards three key objectives: increasing the total revenue available for the reconstruction and development of South Africa; reversing the shift of the tax burden from companies to individuals; and making the entire tax system more progressive and equitable. We should aim at a tax structure which is progressive at every level, which is efficient, and which maximises the welfare of all South Africans. Mechanisms to reach this objective include but are not limited to the proposals discussed above. Other measures could include the following:

• Agreeing on an appropriate band for the revenue : GDP ratio.
• The introduction of a solidarity tax to finance development
• A land tax to finance a comprehensive reform of land ownership patterns
• Increasing the top marginal rate of income tax at higher income levels. Labour has in the past proposed the introduction of a 55% income tax rate for those earning over R200 000 per annum (1996).

Labour believes that these proposals, combined with those discussed above, will go a long way in making our tax structure more progressive and equitable. Given the extreme levels of inequality, we cannot be content with a tax system which places a heavy burden on working people and the poor and allows companies to carry a diminishing share of the tax burden. South Africa faces massive challenges of reconstruction and development, building on the progress which has already been made. To meet these challenges we will need increased tax revenue. Labour is confident that the Chamber will discuss the proposals tabled here is the spirit of meeting these objectives.

Appendix A

Ad valorem excise and customs duties 1996 – 1999

Description of excisable goods in ad valorem excise tax base	1996	1997	1998	1999
Essential oils	37.5%	15.0%	10.0%	10.0%
Perfumes and toilet water	37.5%	15.0%	10.0%	10.0%
Beauty make-up preparations	37.5%	15.0%	10.0%	10.0%
Preparations for the use on the hair	37.5%	15.0%	10.0%	10.0%
After-share and bath preparations	37.5%	15.0%	10.0%	10.0%
Photographic pates and film	32.5%	15.0%	10.0%	10.0%
Articles of apparel and fur skin	37.5%	15.0%	10.0%	10.0%
Microphones and stands	37.5%	15.0%	10.0%	10.0%
Turntables, record-players and cassette-players	37.5%	15.0%	10.0%	10.0%
Magnetic tap-recorders	37.5%	15.0%	10.0%	10.0%
Video recording or reproducing apparatus	375%	15.0%	10.0%	10.0%
Prepared unrecorded media for sound	37.5%	15.0%	10.0%	10.0%
Records, tapes and other recorded media	37.5%	15.0%	10.0%	10.0%
Reception apparatus for radio-telephony	37.5%	15.0%	10.0%	10.0%
Motorcycles (capacity less than 800cm3)	17.5%	7.5%	5.0%	5.0%
Motorcycles (capacity exceeding 800cm3)	32.5%	15.0%	10.0%	10.0%
Lenses, prisma, mirrors and other optical elements	37.5%	15.0%	10.0%	10.0%
Sunglasses and the like	37.5%	15.0%	10.0%	10.0%
Binoculars, monoculars, etc.	37.5%	15.0%	10.0%	10.0%
Photographic cameras	37.5%	15.0%	10.0%	10.0%
Cinematographic cameras and projectors	37.5%	15.0%	10.0%	10.0%
Image projectors	37.5%	15.0%	10.0%	10.0%
Firearms	37.5%	15.0%	10.0%	10.0%
Computers, printers, modems and other machines	37.5%	15.0%	6.0%	5.0%
Air conditioners, wall/window types, self contained	0%	0%	10.0%	10.0%
Cordless telephone sets	0%	0%	10.0%	10.0%
Cell phones	0%	0%	10.0%	10.0%
Video cameras for non-commercial application	0%	0%	10.0%	10.0%
Caravans	0%	0%	10.0%	0%
Dishwashers (domestic)	0%	0%	10.0%	10.0%
Yachts, boats (sail & motorboats) and jetskis (1999 only jetskis)	0%	0%	10.0%	10.0%
Road-wheels of magnesium	0%	0%	10.0%	0%
Wrist watches, pocket watches and other watches	32.5%	15.0%	10.0%	0%
Loudspeakers	0%	0%	0%	10%
Fireworks	0%	0%	0%	10%

Source: Department of Finance, Budget Review 1999

 

Footnotes:

1. [1] Harber (1995) “South Africa’s public finances”.

2. Budget Review, 99/2000

3. M. Samson (1999) “Poverty-eradicating job creation”.

4. This is the lowest income bracket included in the study and includes households earning below R4000 direct income per annum.

5. This is the highest income bracket included in the study and includes households earning above R100000 direct income per annum.

6. South African Health Review, 1998

7. C Haarmann and D. Haarmann (1998) “Towards a comprehensive social security system in South Africa”.

8. [1] The firearms example also points to a contradiction within government policy of strengthening gun controls.

9. Income in this table refers to income after income tax.

10. Telephonic discussion with Nookie Steyn, Department of Finance, July 1999.

11. M. Samson (1999) “Poverty-eradicating job creation”.

12. M. Samson (1999) “Poverty-eradicating job creation”.

13. M. Samson (1999) “Poverty-eradicating job creation”.

14. M. Samson (1996) “Re-evaluating South Africa’s fiscal constraints on transformation”.

15. C. Cnossen (1988) “Global trends and issues in value added taxation”.

16. From Coopers and Lybrand (1996).

17. Basic food items that are zero rated are:  brown bread, maize meal, samp, mealie rice, dried mealies, dried beans, lentils, pilchards/sardines in tins, milk powder, dairy powder blends, rice, vegetables, fruit, vegetable oil, milk, cultured milk, brown wheaten meal, eggs, edible legumes and pulses of leguminous plants.  The number of zero rated items has varied from time to time.  Following the increase in the VAT rate from 10% to 14% in April 1993, saw the increase in the number of zero rated items to the 19 above mentioned items.

18. Income elasticity measures the responsiveness of consumption of a good to changes in income.  An income elasticity between 0 and 1 indicates that if income rises, consumption of the good would tend to rise but by a lesser degree than the increase in income.  An income elasticity greater than 1 indicates that if income rises, consumption of the good would tend to rise by a larger degree than the increase in income. 

19. This ratio indicates the relative importance of a good in the budget of the lowest income bracket as compared to the budget of the highest income bracket.

20. Katz Commission figures.

21. Subsidised pricing is already being practiced by some municipalities, such as Pretoria, to encourage lower electricity consumption.  In other areas costs of electricity fall with higher consumption levels, meaning that lower electricity consumers – the poor – effectively cross-subsidise higher users

22. Department of Finance (1999) “Budget Review”.

23. The Reagan Report’s May 1985 proposal for a MTC in the USA proposed it to “minimise the number of high-income corporations paying little or no tax as a result of heavy utilisation of tax preferences.  The 1986 Committee on Finance of the Senate (also in the USA) argued that “tax fairness also requires that corporate taxpayers pay amounts of tax appropriate to their level of earnings.  The committee finds it unjustifiable for some corporations to report large earnings and pay significant dividends to their shareholders, yet pay little or no taxes on that income to the government.  The committee has designed a strong alternative minimum tax for corporations, based on a broad tax base, to prevent corporations from significantly reducing their tax liability.” 

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