The South African government should reduce tax rates to grow the economy and increase tax collections, according to Yasmeen Suliman, director corporate tax at KPMG.
She believes that a move like this could be the legacy that Pravin Gordhan leaves behind in his 2014 Budget speech.
“With an economy facing languishing growth and dangerously high unemployment levels, it is unlikely that sufficient sustainable jobs will be created to reduce unemployment levels significantly”, said Suliman.
“A depressed economy means lower tax collections, and with a ballooning government deficit, the Treasury is under pressure to collect more revenue to fund expenditure.”
Suliman regards the situation as desperate and believes that desperate times call for drastic measures - cutting tax rates to increase economic growth and tax collections.
It has been proven that there is a graphical relationship between tax rates and tax collections, she said.
It has also been shown in overseas examples that a tax cut had a positive impact on economic growth and unemployment levels.
This explains why tax collections increased over the medium to long term. Even though tax rates had reduced, there was a larger base to collect taxes from.
“It has also been postulated that governments should not set tax rates at the revenue maximising point, but rather should set tax rates at a point below the revenue maximising point, which would maximise economic growth instead,” said Suliman.
“Higher economic growth presumably would lead to higher tax collections in the long term due to a growth in the underlying tax base.”
This theory was supported by South African research at the University of Pretoria in 2008, which showed that our tax rates are too high to support growth.
Around this period tax collections as a percentage of GDP was 26%-28%, whereas the optimal growth maximising tax ratio was estimated to be 21.94%.
“If internationally there is evidence that reducing tax rates may impact positively on growth and unemployment, then this option should certainly not be ignored,” she said.
Speculation is rife that February 26 2014 will see Gordhan reading his last Budget speech as the Minister of Finance.
“As his swansong, reducing tax rates will certainly be an act that will leave a legacy,” she said.
This article first appeared in Fin24, 14 February 2014.