Bracket creep, VAT and the 2017 Budget

Year on year the personal income tax tables are adjusted and based on which individuals are taxed based on an increasing sliding scale based on their income earned and therefore into which tax bracket they would fall. The annual adjustments are partly to provide for tax relief or an additional burden on certain salary earners, and partly to provide for the effect of inflation.

Consider for example the primary rebate of 2015/2016 (R13,257) compared to that of the 2016/2017 tax year (R13,500). This has now been increased to R13,635 for the 2018 fiscal year. Applying the lowest tax threshold of 18% thereto, this translates into the annual income tax free receipts of R73,650 in 2016 being increased to R75,000 in 2017, and to R75,750 subsequently for 2018.

This means that the threshold at which individuals are taxed increased by 1.8% and 1% effectively over the past two years. In non-real terms therefore tax relief was effected for those individuals earning at the lower end of the tax bracket: where a salary of R6,138 per month would have been income tax free in 2016, this amount in 2018 is now R6,313.

Taking into account that inflation is considered to have averaged between 5% to 7% over this period though, in real terms therefore even those on the lower end of the income are paying more taxes on income in real terms in 2018 than would have been the case in 2016. The effect of so-called “bracket creep” (whereby taxes are effectively increased through the effect of tax brackets not being adjusted sufficiently to cater for inflation) is a phenomenon acutely effecting not only the rich, but the poor too, and especially so over the past two years.

The observation above is relevant in the context of the debate surrounding the potential change in the VAT rate. VAT is considered to represent a regressive tax system whereby everyone, rich or poor, pays the same amount of tax based on consumption of goods (subject to certain basic goods that are exempted). The personal income tax regime in contrast represents a progressive tax system whereby the rich are taxed proportionately more and at increased rates based on their respective income levels. The political dynamics therefore dictate that a pro-poor tax system be focussed more heavily on income tax with increasing tax brackets rather than a flat VAT rate applied to everyone across the board. It is for this exact same reason why there is so much rhetoric and political noise in the media opposing an increase in the VAT rate, especially where the pro-poor movements such as the trade union movement and the SACP are involved.

What the above effect of bracket creep illustrates though is that Treasury is nevertheless, in an indirect manner, systematically also increasing the tax burden on the poor through bracket creep, yet in a more subtle manner whereby it is at the same time avoiding getting involved in the political quagmire that is the VAT rate. An implicit acknowledgement perhaps from Treasury that the wealthy alone cannot absorb increased tax burdens?

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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