Every time there is a budget speech, some sort of tax code reform, or even just talk of taxes in the media, there tends to be a wave of articles written by newspapers, magazine and online media highlighting what has been happening.
The problem is though, that any talk of taxes, reforms, budgets and the like tend to be written and explained by industry professionals, aimed at industry professionals, and occasionally simplified enough that students and junior members of the tax industry can understand.
This article will at least attempt to make the seemingly foreign language that is taxation a bit more understandable to the general public, as we are ultimately affected by the decisions made in that regard.
As much as Tax is an economic phenomenon, in that it allows for stable growth of a country’s infrastructure, budget and overall wealth, it is also a highly political field, due to the nature of the tax system. Tax is meant to take money from individuals and businesses in society in order or spend that money for the common good, and ultimately to benefit the poorer members of society by providing them with services and basic goods that they cannot afford.
As a result of this system, tax is seen as ‘progressive’, which means that the more money you earn, the more of your income is taken as tax. Because of this, especially in South Africa, which has a relatively poor tax turnover rate (the number of active taxpayers versus overall population), the top 5% of taxpayers (those earning over R250 000 per annum) are responsible for over 40% of the total tax income of the country.
Over the years, the South African government have gradually made provisions in the tax laws to stop taxpayers from doing what is known as ‘tax avoidance’, which is perfectly legal, and is done by dedicating a percentage of your salary to non-taxable items. As a result the tax payers needing to pay less tax at the end of the fiscal year.
An interesting effect of the progressive nature of tax is the fact that anyone earning over a certain amount will fall into the top tax bracket of 40% (earning over R638 601 per annum), effectively only pay around 28-30% tax on average, because of how any money above that number is taxed as a percentage on its own. For example, if you earn R700 000 per annum, you will be taxed 38% (or R185 205) on the R638 600, then another 40% (or R24560) on the extra R61 400 over and above that, giving you a lower total tax payment of R209 765 (only 29.9% of the total) than R280 000 you would have paid if taxed at 40% on the whole amount.
Another significant part of the tax laws is what is known as ‘fiscal drag’, which happens when tax rates are not adjusted to fit with inflation, causing many people to be bumped up into higher tax brackets even though they are not earning enough to comfortably afford it.
Value Added Tax (VAT) is a system of taxation that is, at face value much simpler and easier to implement than Income Tax, as it is a uniform percentage added on to products nationwide. The problem, however, is that it is known as ‘regressive’ instead of progressive, because the richer classes (or tax brackets) pay exactly the same amount of VAT as those in lower brackets. Once the VAT is increased, it affects the poorer members of society much more than it does the rich. This is mainly why there has been vehement opposition to the idea of raising the VAT rate (which is 14% in South Africa).
One should also be careful when it comes to the way that the government talks about tax. It may be that there is a cut in taxes on the horizon, but at what price? Most commonly, Income Tax reductions are accompanied by increases in other types of tax such as Petrol Tax, the newly instated CO2 emissions tax and taxes on items such as alcohol, cigarettes, tobacco and at times even import tax.
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