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Is a tax revolt brewing?

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It came as no surprise to most people that yet another ratings agency has downgraded South Africa’s credit-worthiness, yet again. 2017 has been a year of tough times, in which the country seems to have lurched from one crisis to another, and a year that has fundamentally changed the political discourse of the country.

Tax revoltAmid allegations of state capture by the Gupta family, multiple cabinet reshuffles, and most recently an unpopular budget policy, some South Africans have started talking about starting a tax revolt.

When he was asked about the growing calls for a tax boycott on social media at a recent event, Finance Minister Malusi Gigaba said that he does not foresee a tax revolt among South African citizens. “We will revolt against those who revolt against paying taxes,” he said. “It’s a pessimistic view and a bad message to communicate. The reason we have a huge revenue shortfall is clearly because of the underperformance of the economy.”

With a tax shortfall of R50-billion, Gigaba has established an urgent inquiry into the cause of lowering revenue at SARS. While some believe the problems lie more within SARS and the economy than the tax base, others are blaming the situation on the tax revolt rumblings.

A Facebook group called “Tax Revolt South Africa”, which has just over 20 000 followers, states that “...the people of South Africa have had enough of wasteful government expenditure and corruption and we will hold the government to ransom to enforce change.” However, while a tax revolt has the potential to cripple the country, it carries heavy penalties, including imprisonment, for those that participate.

This is one of the main reasons that experts believe a tax boycott is extremely unlikely. More worrying is the fact that South Africa has reached its limit in terms of the amount of tax revenues it can extract from taxpayers through further tax increases.

Kyle Mandy, Tax Policy leader at PwC recently warned National Treasury and Parliament that the tax increases announced in the February Budget, particularly on personal income tax, would likely push tax revenues very close to the top of the Laffer curve. The Laffer curve was developed by economist Arthur Laffer to illustrate the relationship between tax rates and the amount of tax revenue collected by governments. It suggests that as tax rates increase from low levels, the tax revenues collected will increase. However, at some point further tax rate increases will actually lead to lower tax revenues as the disincentive effects of higher taxes begin to dominate.

According to Mandy, there is evidence that, in the current environment, South Africa has maximised the tax revenues that it can extract from its citizens and has possibly even gone past that point and is now on the downward slope of the curve. “The last few years have seen significant tax increases directed at fiscal consolidation in a low growth environment and amid growing concerns of levels of corruption and government inefficiency,” he said.

Whether a tax revolt does ensue, or Mandy is right and we have reached the other side of the Laffer curve, South Africa’s ability to fund itself is looking increasingly strained. In light of the country’s current credit rating, the option of borrowing has become even more expensive, leaving government and citizens alike between a rock and a hard place.

Image credit: Copyright: mizar21984 / 123RF Stock Photo

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