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Income tax has long been raised – 2015 no exception

Tuesday, May 19th, 2015

This year’s state budget speech by the new minister of finance, Nhlanhla Nene, was the first in recent history that did not include any mention of tax relief. In the 2014 budget speech relief of R9,3 billion on taxes paid by households was announced and in 2013 it was R7 billion. In this year’s speech, however, the minister raised all the personal income tax rates except the 18% rate by one percentage point. This very clearly brought home to the residents of the country the reality of a heavier tax burden. The current tax year is not an exceptional outlier, however. The personal income tax burden in South Africa has been becoming heavier for many years – despite claims of “tax relief”. In recent years the receiver of revenue has time and again claimed a larger percentage of taxpayers’ income, which simply kept pace with consumer price inflation (CPI inflation).

Tax relief? Only if inflation is making you poorer

What was announced as tax relief in previous years were actually adjustments to prevent the tax burden of people whose nominal income rose steadily to keep pace with CPI inflation from increasing at the same rate.[1] The level at which one starts paying income tax in South Africa was, for example, lifted by 5,6% in 2013, 5,35% in 2014 and 4,17% in 2015. However, these increases did not adequately compensate for CPI inflation. Over the same period CPI inflation was on average 5,6%, 5,7% and 6,1% in each of these years. It means that someone whose income kept pace with CPI inflation since 2012 has had to cede a gradually growing proportion of that income to income tax. This is a Catch 22 situation, where your income has to increase to keep up with the rising cost of living, but while that is happening the receiver takes more and more of your money, which makes it increasingly difficult to keep up with the rising cost of living. In other words: in order to benefit from tax relief, you would have had to become poorer.

An employee with a total cost package of R183 585 per year in 2012, would have received a taxable income of R180 000[2] – which is R15 000 per month. Such a taxpayer, with a medical rebate for a family of four, would have paid about R1 095 per month in income tax, resulting in an after tax income of R13 905. If this employee did not receive any pay rises in 2013, 2014 and 2015, he would have to pay income tax of about R693 per month in 2015 – nearly 37% less than before. This is what “tax relief” refers to. His after tax income would then have been R14 307 per month – 2,9% more than before. In the meantime, however, the consumer price index, one way of measuring the cost of living, rose by 18,4%. This employee therefore had to become 18,4% poorer in terms of CPI in order to receive an “increase” of 2,9% from tax relief. It is reminiscent of a 419 scam, where a swindler promises to pay a large amount of money if the victim pays over a smallish amount in “administrative costs” upfront. Only in this case the amounts are reversed – the victim has to give up a large amount in order to receive a small amount. That is impoverishment, not prosperity.

Tax relief with CPI-related increases?

If the taxpayer in the previous example had indeed received annual increases equal to CPI inflation on his total cost package, then his taxable income in 2015 would be have been almost R17 800 per month, some 18,6% more than in 2012. His tax would however have increased by more than 28%, from R1 095 per month to about R1 406 per month, with the result that his after tax income would have increased by only 17,8% from R13 905 to R16 385. While the employee’s total cost package indeed kept pace with CPI inflation, the inadequate adjustment of tax brackets caused his after tax income to fall behind CPI inflation.

Now say this employee received annual increases of 1,5 percentage points higher than the relevant annual figure for CPI inflation precisely to be better able to keep pace with higher living costs. In 2013 this increase would have been 7,1%, 7,2% in 2014 and 7,6% in 2015, which would have increased his taxable income over the period by 23,8% from R15 000 to R18 566 per month. The employee’s monthly tax would however in this case have increased by almost 47%, from R1 095 to R1 608, with the result that his after tax income would have been only 22% higher despite the cumulative 23,8% increase in taxable income. The employee’s increases, aimed at keeping pace with rising living costs would therefore, despite the “tax relief”, have resulted in him paying a larger percentage of his income to the state in 2015 than in 2012: 8,7% as opposed to 7,3%.

This effective increase in income tax did not happen only in the latest tax year, with the higher marginal tax rates. The table below indicates the proportion of taxable income that an employee with increases equal to CPI inflation has had to cede to income tax in each of the last four tax years.

Personal income tax levels with increases equal to CPI inflation

2012

2013

2014

2015

Starting point of R183 585 total cost package in 2012

Taxable income per month

R15 000

R 15 848

R 16 760

R 17 792

Income tax per month

R 1 095

R 1 181

R 1 253

R 1 406

Percentage income tax

7,3%

7,45%

7,48%

7,9%

Increase in after tax income

5,5%

5,7%

5,7%

CPI inflation

5,6%

5,7%

6,1%

Starting point of R302 361 total cost package in 2012

Taxable income per month

R24 800

R 26 197

R 27 699

R 29 398

Income tax per month

R 3 744

R 4 000

R 4 237

R 4 710

Percentage income tax

15,1%

15,27%

15,3%

16,0%

Increase in after tax income

5,4%

5,7%

5,2%

CPI inflation

5,6%

5,7%

6,1%

 

Not only income tax

While the government increased the income tax burden on South Africa’s taxpayers over the last three years, despite claims of “tax relief”, other national taxes also increased. State levies on a litre of petrol now amount to R4,13, which is 42% more than the R2,90 per litre in 2012. In the meantime higher carbon taxes have been introduced on new vehicles and electricity, higher taxes on liquor and cigarettes, as well as import duties on various products, from chicken meat to computer screens to wheelbarrows, car tyres and batteries – not to mention the e-toll system! All this is happening without the few million taxpayers[3] seeing any increase in value for their tax money – instead, the opposite is true.

In the long term this approach by the South African government is counterproductive, since it discourages precisely those people who are able to add value to the economy from doing so. It hampers economic progress, without which social upliftment and improvement are doomed to remain unrealised political slogans.


[1] Inflation, driven by the government’s monetary policy, can in actual fact also be regarded as a form of tax. Read the article on that topic in this issue.

[2] The difference is due to a skills levy of approximately R1 800 and unemployment insurance fund contribution of approximately R1 785 by the employer.

[3] Read the other article in this issue for more information on how many taxpayers there actually are in South Africa.

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