TAX REGIME: Revolt in the air

SA taxpayers have been pushed too far — especially by the current administration and its spending habits. The wall of opposition to Gauteng’s e-tolls, violent service delivery protests and, some argue, even xenophobic attacks on foreign-owned businesses are clear indications that SA’s citizens are fed up with the status quo.

In addition to the total burden of taxes on the economy and its people having increased significantly, there is growing taxpayer concern at the apparent waste of their contributions through highly controversial government spending — for instance, on the president’s private Nkandla estate — as well as an unending parade of corruption scandals and tender fraud.

A rising government expense burden has constrained economic growth and retarded tax receipts, which in turn has perpetuated and compounded the social problems of poverty and unemployment, despite the ruling party’s stated commitment to overcome them.

Reports of an alleged rogue SA Revenue Service (Sars) spy unit and the subsequent loss of top officials from the agency have added fuel to the fire.

According to DA shadow finance minister Dion George, many politicians were aware of the unit as far back as 2009 and don’t understand why a fuss is being made now. He says Sars has always been held in high regard and the lack of information being released to the public on the current investigations does not bode well for the relationship between the state and the taxpayer.

“The minister and commissioner need to unpack the situation to the public but there seems to be no interest in taking such action because taxpayers are being taken for granted,” says George.

Does this growing disgruntlement signal a taxpayer revolt, at least in its modern, passive-aggressive sense?

The deputy CEO of the SA Institute of Tax Professionals and former treasury chief director of legal tax design, Keith Engel, certainly thinks the rumblings are there.

Tax revolts aren’t anything new. Historically, they tended to erupt when warring kings imposed levies on the disenfranchised masses to fund unpopular wars. The American revolution against Britain was sparked in this way with the 1773 Boston Tea Party, when the colonials, in protest against the tea tax, dumped crates of tea into the harbour. The famously invoked slogan, “no taxation without representation”, coined during the 13th-century birth of the Magna Carta, was the basis of English democracy.

“In modern times tax revolts are, however, far more subdued,” says Engel. They more closely resemble California Proposition 13, which acted as a political precursor to the rise of the antitax policies of the Ronald Reagan presidency.

“In essence, modern tax revolts tend to be more spiritual as opposed to physical — especially among corporate executives and higher net worth individuals,” he says.

“Such taxpayers engage in various forms of tax evasion or tax avoidance.”

Examples include gross receipts that are often underreported, double reporting deductions by business and provisional taxpayers. “The upper echelons of society tend to be even more subtle given their stake in society, shifting their riches to offshore accounts in tax havens to reduce their taxes to reasonable levels,” Engel says.

Supporting this notion were recent revelations of global banking giant HSBC’s dealings with clients who hid hundreds of millions of dollars from tax authorities. HSBC threatened the Sunday Times for exposing the wealthy South Africans who stashed R23bn in secret Swiss bank accounts, demanding all this data be “destroyed”. The list of SA clients includes CEOs of blue-chip companies, diamond dealers, sports stars and a key figure in the arms deal, the Sunday Times reported. Sars executive Vlok Symington told the newspaper Sars was “analysing” the information.

And a report produced by the African Union high level panel , chaired by former president Thabo Mbeki, states that SA is losing billions in unpaid taxes as companies and wealthy individuals siphon money out of the country. This amounts to US$81,8bn or 11,4% of Africa’s total illicit financial flows, the report says .

“In terms of economic class action, the poor and lower-income groups tend to be the most physical,” says Engel.

The latest data from Municipal IQ’s Hotspots Monitor, which tracks service delivery protests across SA, shows there were more major protests last year than in any previous year since the protests began in 2004.

Protests against Gauteng’s e-toll road levies have been dragging on for three years, the latest being a gathering of around 100 DA supporters in front of Gauteng premier David Makhura’s office in Johannesburg last week to picket against his failure to call for a referendum on e-tolls.

Treasury has stated that e-toll tariffs will be adjusted downwards but that government remains committed to the principle of road users funding improvements to keep the SA National Roads Agency solvent.

Finance minister Nhlanhla Nene said in his recent budget speech that “concerns regarding the socioeconomic impact of toll tariffs have been heard, and revised monthly ceilings will shortly be proposed”. He added that further government funding could be expected when he tabled his adjustments appropriation in October.

In response to Nene’s comments, the Opposition to Urban Tolling Alliance (Outa) said on its website that a partial bailout by reallocation of funds would not entice the public to pay e-tolls — as was the case when former finance minister Pravin Gordhan extended R5,7bn to the scheme in 2012 to reduce the tariff from 40c to 30c.

“Nothing happened. In fact, a lower rate makes the scheme more irrational by increasing the percentage cost of collection,” says Outa. “Before users of the overpriced roads can be expected to pay anything, they need absolute assurance that the collusive costs to be recovered are market related and fair … There can be absolutely no doubt that e-tolling does not enjoy the necessary critical mass of public consent for legal enforcement to succeed.”

The DA has called for a ringfenced fuel levy instead of e-tolls to pay for roads.

Nene increased fuel prices by 80,5c/l as from April 1, which includes a 30,5c/l fuel levy for the general pot (no SA taxes are ringfenced currently) and a 50c increase in the road accident fund levy.

This was “shocking”, KPMG risk manager Frank Blackmore told Business Day on budget day. “The poorest-paid workers in SA will have to foot that bill.” He said treasury had sidestepped a value added tax (Vat) increase but had taken a regressive step that would affect the poor disproportionately.

Many other components of the fuel price had already increased in the past year. Both the wholesale and retail margin were increased in December and rising international oil prices and a weak rand had played havoc on consumers’ pockets.

Taxes and levies now made up 60% of the fuel price — the highest level in a decade, he said. The world was not going to enjoy a US$60barrel oil price for long and when it climbed back, the average consumer was going to be nailed, Blackmore added.

The bulk of the increase in revenue, however, will come from an increase in personal income tax (already higher than in other emerging market countries). Nene increased personal tax rates for the first time in 20 years — a 1% hike across all brackets except the lowest, which will compensate for fiscal drag.

Kemp Munnik, head of taxation services at SizweNtsalubaGobodo, says a mere 11% of registered taxpayers bring in 61% of personal taxes. “I’m not sure how much longer the 11% will tolerate this,” he says.

Despite the usual adjustment of tax brackets to allow for the effect of inflation, the 1% increase in rates for everyone with a taxable income of more than R181900/year means the actual tax burden in real terms will increase by at least 3%, after allowing for the effect of inflation.

With this comes an additional R10/month for the average middle-class household for the increased electricity levy and a further R65/month for the average commuter as a result of the higher fuel levy.

Not to mention several other tax measures to prevent tax leakage.

Kemp says the bigger issue is what taxes are being spent on and that looking at forecasts for the next three years, the rise in taxes has only just begun.

“Funds for the public-sector wage bill, the national health insurance, failing parastatals and SA’s nuclear power plan have to come from somewhere,” he says.

“Government will seek to raise additional revenue to the tune of R44bn over the next three years, with possible avenues for this including further raising the individual tax marginal rate and fuel levy, raising capital gains tax (CGT) and dividends tax and even increasing the Vat rate,” he surmises.

“Taxes that will be raised, and in terms of available options, the increased revenue will clearly come mainly from higher-income earners,” says Old Mutual Investment Group economist Johann Els. “However, though raising the Vat rate would undoubtedly be politically unpopular, its announcement would be tempered by the raising of top-end individuals’ income taxes, capital gains and dividend taxes. The next national election is a long way off, so now would be the time to do it, especially considering that we have a very low Vat rate compared with the rest of the world, and raising it by only 1% would bring in an additional R15bn.”

The increase in tax could not have come at a worse time, with further electricity and petrol price hikes in the pipeline for this year . It will all have an impact on disposable income and likely place a damper on consumer spending and economic growth .

Chris Hart, chief strategist at Investment Solutions, writes on the company blog that the challenge facing government is strong signs of tax-base exhaustion. “Households are already in deficit,” he says. Yet tax receipts fell short of last year’s projections and will fall short again if economic growth does not materialise.

Government finances are in the process of being introduced to the Laffer Curve, he says. This economic theory predicts that if taxpayers are exploited beyond a certain point and taxes rise above a certain threshold, actual tax collections start to fall.

An aversion to taxes is well documented in various reports, most notably the Canadian Carter Commission report commissioned in 1962 by then PM John Diefenbaker to examine and recommend improvements to the federal taxation system. The report found the resistance line tended to fall at 50% of total earnings.

But Engel says though previous finance ministers rightly postponed tax increases for as long as possible, Nene had to take the plunge.

Treasury has made no bones about the fact that SA’s public finances are straining the limits of debt sustainability. “We had to raise taxes and cut expenses to get out of trouble,” he admits. Government debt has almost doubled from 21,8% at the beginning of the 2008 financial crisis to 40,8% in 2014/2015. Interest payments on this debt, at R115bn this fiscal year, have become the fastest-growing item of government expenditure. SA is budgeting to spend a whopping R420bn on debt service costs over the next three years.

In addition to tax increases and curbs on wastage, the state plans to reduce expenses by R25bn. “But cutting costs will be nominal if we don’t get the bloating government payroll under control and eliminate corruption and inefficiencies. Government can’t continue to stimulate the economy by employing more people,” says Engel.

So the question is whether a higher tax burden will be the straw that breaks the camel’s back and leads to a full-blown tax revolt. Hart says the income tax burden is already high, especially when considering that the expenditure aspect is aggressively redistributive. “This means the after-tax effect leaves the bulk of the tax base still having to make provision for education, health and security.” And enormous economic damage is done through taxes that target capital formation and investment viability, he adds. These include CGT, property transfer duty, estate duties, dividends tax and taxes on interest earned. CGT was raised two years ago. This year, it is property transfer duties. Dividend taxes were introduced in 2012.

Hart says government expenditure is also notoriously ineffective. Despite devoting a high proportion of expenditure to education, for example, the outcomes suggest much of the expenditure is wasted. The same applies to other areas of government. “Corruption and waste raise the tax burden, and rewarding this with more money compounds the problem,” he says.

The perception is that treasury and Sars are well aware of the risks of a potential taxpayer revolt, says Ettiene Retief, chairman of the SA Institute of Professional Accountants and chairman of the national tax and stakeholders (Sars and treasury) committees. “We’ve seen it with e-tolls. If they weren’t aware of it before e-tolls, they’re certainly aware of it now,” says Retief, who is actively involved in the Sars joint stakeholder committees and specific sub-task force teams.

According to Retief there has been a decay in tax morality as a result of the increasingly draconian nature of tax collection, prompted by tough tax collection targets as well as the irresponsible way taxpayer money is being spent.

“Sars has ever-increasing tax collection targets, which in a stagnant economic environment become more difficult to reach,” he says. “When tax morality breaks down, taxpayers start reducing their tax liability and at times step over the line, for example, by decreasing their level of disclosure to authorities.” And even though this is becoming more difficult since Sars has access to so much information from various service providers, such as banks and insurance companies, it doesn’t mean taxpayers won’t try, Retief says.

A full-scale tax revolt would need a large number of people and might be very difficult to pull off. But it doesn’t mean it can’t happen. “The unions brought the platinum sector to its knees with a five-month long strike last year and can do so with government,” says Retief. “The problem is that the unions don’t care much for the unemployed, who don’t pay membership fees.”

The DA’s George says there is a precedent of civil disobedience when tax authorities blatantly treat taxpayers disrespectfully.

In 1996, the Greater Johannesburg Transitional Metropolitan Council imposed a huge increase in property rates combined with a levy on one of its four substructures, which included Sandton, to finance improvements in less-affluent sections. Sandton residents and business formed ratepayers’ associations and adopted a “boycott” to demonstrate their protest. They used the avenue of a court challenge in their attempt to have the rates decision revoked. The Johannesburg high court dismissed the ratepayers’ case with costs.

A few years back, ratepayers in towns across SA such as Sannieshof and Tswaing in North West withheld rates and taxes from municipalities. In some places they were providing municipal services themselves. They justified taking these steps based on the lack of service delivery.

George says the narrative continues. “Taxpayers are becoming more belligerent about tax, firstly because they don’t see the value in their money. The other part is the actual burden of tax,” he says. “The latest tax increases were unnecessary. As the official opposition, our alternative budget stated that if we cut the public-sector wage bill and limited general wastage and state-owned enterprise leakage, we could actually provide some relief to taxpayers.”

George says everyone must pay a fair share and not being tax-compliant holds severe penalties, but after serving as an MP for eight years, he says people are angrier than ever. “Many have written to parliament suggesting a tax boycott.”

“The social contract — paying taxes and subsequent service delivery — has been compromised,” he says. “Also, is everyone paying their fair share of tax?” referring to fringe benefits payable by President Jacob Zuma on the upgrades to his homestead at Nkandla and income taxes of his associates.

“The public doesn’t have this information as the Sars-taxpayer relationship is confidential,” says George. “But I find it quite interesting that when Sars started looking at politically connected people, the rogue Sars unit became a big deal.

“All I can say is that the temperature is going to go up and that tax-compliance problems will probably arise, especially now that confidence in Sars has been shaken.”

Engel says that when you’re talking about a tax revolt, it usually begins in several places. People become more resistant to paying taxes, they complain (see story on page 20) and demonstrate against the misuse of revenue and lack of service delivery.

“I think one of the big issues that’s being discussed is that you can’t talk about tax and isolate expenditure. The real issue in SA is not a tax problem. It’s an expenditure problem. Simply, we’re trying to do too much with too few resources,” he says.

Original story by Ruan Jooste

Ruan Jooste is an associate editor at the Financial Mail responsible for the Money & Investment section.