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New thinking needed on taxes to buffer slowdown

07 September 2015   (0 Comments)
Posted by: Author: Amanda Visser
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Author: Amanda Visser (BDlive)

South Africa has been hit by the perfect economic storm. International commodity prices are down, the country has had no growth for six months and interest rates have been increased despite weak economic prospects.

Confidence levels are at the same level as if the country is in a full-blown recession, says Dave Mohr, chief investment strategist at Old Mutual Wealth.

He says contradicting public statements by President Jacob Zuma, saying one day that all is not "doom and gloom" and the next that the economy is "sick", certainly do not instill confidence in how the country is run.

Against this backdrop the effect of the current tax and policy framework on the South African economy will be discussed at the annual Tax Indaba in Johannesburg next week.

Credit-rating agencies are keeping a hawk-eye on South Africa and there is no room to increase the budget deficit in these circumstances.

Finance Minister Nhlanhla Nene told BusinessDay a few days ago the economic contraction in the second quarter is concerning, "as it may constrain revenue collection and negatively affect budget deficit targets".

Figures released by Stats SA at the end of last month shows that SA’s gross domestic product (GDP) decreased by a seasonally adjusted and annualised rate of 1.3% in the second quarter compared with an increase of 1.3% in the first quarter of this year.

According to Mohr, taxpayers are undoubtedly in for a rough ride. They will be squeezed even more by the South Africa Revenue Service because of the economic slowdown and the expected impact on revenue collections.

Econometrix chief economist Azar Jammine says government is aware it cannot increase the tax rate on personal income much further.

His figures show that 61% of all personal income tax is being collected from 1.4% or around 800,000 of the taxpaying population who earn more than R500,000 annually.

Mohr says the economy has not been in such a precarious position for years. Commodity prices have halved in recent times, and it has been suggested that half of all mining activities in the country are unprofitable.

"It is worrying to note that commodity prices have not even reached historic lows, and prices could continue to fall.""It is worrying to note that commodity prices have not even reached historic lows, and prices could continue to fall."

Jammine suggests a tax of a quarter of a percent on all financial assets. He admits the danger of this becoming a cash cow for government is real.

However he adds that something has to be done in a "different way" or capitalism will ultimately collapse.

"The people who are benefitting at the moment do not appreciate the time bomb that is facing capitalism. It is not that capitalism is not working," says Mr Jammine.

"Ideally I would like to see the introduction of these wealth taxes as a quid pro quo for reducing VAT and personal income tax," he adds.

This article first appeared on bdlive.co.za.


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