The rumoured VAT hike as part of the Budget Speech poses the risk of eroding the spending power of poor and lower-income households, exacerbating poverty and increasing inequality.
In fact, taxes on goods VAT plus excise duty hit the poor hardest. It would also make basic goods more expensive and necessitate a proportional increase in social grants and wages in order to maintain the buying power of the poor and workers. At the same time, the statistical model used by the National Treasury to support a VAT increase rests on highly improbable assumptions.
While VAT is successful if considered solely from the perspective of revenue-raising, and ignoring its potential negative impact on the poor, where other options are available taxes that hit the poor hardest, make the consumption of basic goods more expensive, and increase inequality should not be entertained.
Overall, taxation in South Africa is mildly progressive, meaning the wealthier pay a higher share of overall taxes. Partly it is to do with what they spend their money on. Lower-spending - and lower-income - families are likely to spend a bigger share of their money on these basic items, so VAT tends to be a smaller percentage of their household bills.
Moreover, households facing tighter finances might be expected to spend less on high-VAT items such as a new car or new furniture, cushioning the blow. Nonetheless, some items that households may deem essential are taxed at the standard rate, which has just risen - notably petrol, which was also hit by a New Year rise in fuel duty. But there could also be something else going on in the data, because a lot of spending can be quite lumpy.
A "big spender" in one year may be someone who has just moved into a new home and bought a lot of furniture and other big ticket items. Or it could be someone who has just bought a new car on credit to last the next 10 years. This person would show up towards the higher end of the spending scale, even though they may not earn much, and in other years they would not spend so much.
And all of those big one-off purchases would have been subject to VAT, meaning this person would be hard-hit by the VAT rise. Some may say these arguments are a bit academic and ignore Mr Osborne's point that VAT is more progressive compared with other possible revenue-raising options. Labour's claim of unfairness is questioned by Adrian Houstoun, from the chartered accountancy firm Kingston Smith. He notes that - unlike with National Insurance, which is levied on people's incomes - households can reduce their VAT bill, because they have a small degree of flexibility over what they spend their money on.
Contrast that with VAT, where everyone pays the same tax rate for the same items. Moreover, the government did have another more unambiguously progressive option, which was to raise more money through income tax.
Income tax bands and allowances are specifically designed to ensure the poorest pay least. Their results also show that the distribution of a narrow-based VAT that excludes spending on food, housing, and health care is much the same as the distribution of a broad-based tax table 1.
Benedek, Dora, Ruud A. Tax Analysts. Skip to main content. How does the federal government spend its money? What is the breakdown of revenues among federal, state, and local governments?
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