Benefits to raising VAT

INDIRECT: BROADENS THE RATE AND GETS EVERYBODY TO PAY SOME TAX

- Adriaan Kruger

It looks like Finance Minister Enoch Godongwana doesn't realise that people hate it when taxes increase – especially when they feel that corrupt and incompetent government officials are wasting taxpayers' hard-earned money. The minister is also a very bad salesman.

Firstly, he should have sold the idea of the increase in value added tax (VAT) from 15% to 17% to all the members of the government of national unity (GNU) – and even the public – when he was drafting the budget months ago.

It would also have helped if he did not say – as the first reason – that the increase in the VAT rate is necessary to increase the wages and salaries of state employees.

The minister should also have outlined the benefits of a higher VAT rate. A tax on consumption (VAT or a general sales tax) broadens the tax rate and gets everybody to pay some tax.

Old Mutual chief economist Johann Els said it is important to note that there are benefits to increasing VAT rather than other taxes.

“If you look at the mix between direct taxes and indirect taxes, we have seen a large increase in direct taxes [income tax on salaries] for the last two years as there was no adjustment for inflation in the tax scale [bracket creep],”

“This year, the focus is on indirect taxes. Then, one should realise that there are many benefits to increase indirect tax [VAT] rather than direct tax rates.

“Rating agencies and foreign investors who buy government bonds prefer indirect taxes as it broadens the tax base,” he said.

Few taxpayers

Els said the difference between a high income tax on a small base – already a big problem in SA and a source of criticism – and a bigger tax base by raising VAT is easy to imagine.