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
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
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