Proposal to change taxation of new income in South Africa

By the way, did you know that half of the adult population survives with almost no savings? While just 3,500 people own 15% of the country’s wealth? Yes, it’s absurd.

In this article, we will show you behind the scenes of South Africa’s tax part and how it influences society. Keep reading.

Uneven distribution: root of the problem

An important fact to be highlighted here is this: a large part of African society was shaken to survive the contraction of the economy—the result of the lockdown.

Before the lockdown, about half of the population was already in debt or had close to zero net worth. And with the arrival of this new crisis, millions of people have sunk further into debt—needing to resort to loans that will not be paid back, even begging and starving.

This was already a common problem, but it is becoming more and more intense. This makes the government create the necessary policy solutions to absorb the shock and recover quickly. After all, they need to reallocate resources to give everyone an equal chance of surviving the shock.

One step towards this is the proposal to change the way income is taxed in South Africa—which could be a solution to this concern. See just more about it.

Proposal to change taxation of new income in South Africa

In the latest OECD Economic Survey for South Africa in 2022, it was revealed that there is a progressive income tax schedule. It ends up harming the low-income population and benefiting the high-income population.

The downside of this story is that the tax benefits covered by this same income tax that ends up paying for transportation, stock options, and health care on behalf of employees, undermine the progressivism of the tax system.

Therefore, a complete tax reform would be the best option for South Africa. The government is proposing a fiscal package that lowers the spending ceiling and increases tax revenue by at least R$44 billion over the next three years.

With this, PwC supports a form of policy where there is a tax reform, yes, as a way to support economic growth. This is sure to raise taxes with the least negative impact on economic growth, investment, and employment.

It also reduces dependence on taxes that distort incentives to work and invest. So getting the structure of the tax system right can boost economic growth and increase employment—this is nothing new for anyone.

Also, did you know that corporate income tax is the least growth-friendly type of tax? This makes it clearer that it is necessary to progressively change the tax mix to stimulate economic growth. Furthermore, it is also necessary to support fiscal sustainability will bring clear benefits in the future—there is no doubt.

Finally, it is important to make clear here that the main objective of tax reform is to stimulate the economic growth boom and build a sustainable revenue base for the government. This base needs to be aligned so that there is a realignment of the tax mix between tax income and consumption tax.

However, if tax reform is packaged together with social security reform to ease the growing burden on the poor it could make this tax reform politically viable.

Wealth tax

To fight inequality and finance the basic income subsidy in South Africa, a solution was established. This solution is a wealth tax target for high-income people mentioned by leading figures in the industry.

In theory, a progressive wealth tax has been proposed, which would apply only to South Africans with net worth currently over R3.6 million. To think about it, this figure reaches the 354,000 richest (1% of the adult population).

Taking into account the recent fall in the value of the Johannesburg Stock Exchange’s All Share Index and assuming an evasion rate of 30% we assume that such a tax would raise R143 billion. That would still leave the rich with very high levels of wealth. Furthermore, for each of the bands, after-tax wealth would average R9.3 million, R50 million and R376 million, respectively.

In this case, a wealth tax, contrary to popular opinion, would not necessarily discourage job-creating investment. The opposite effect would be delivered, as maintaining fiscal sustainability by saving the most vulnerable is essential to ensure a quick recovery and attract investment.

The target should ideally be the 5% of people with high net worth and property with significant assets, said Mmamoloko Kubayi, the party’s head of economic transformation. Let’s wait for the next scenes.