Media release: Tax Freedom Day comes early in 2020, but, thanks to Lockdown, this is not good news.

06 May 2020
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Media release
06 May 2020

Tax freedom day (TFD) in South Africa would have been today, 6 May. Every year, statistician Garth Zietsman calculates TFD from the Budget, including tax revenue and GDP forecasts.

This year, if it was a normal year, his calculations would have shown that, if the average South African had donated 100% of their income to the government from 1 January, they would have paid all their 2020 tax by today, 6 May.

Anything they would have earned from now on would have been theirs. If TFD could have been earlier than the 6th of May, this would have been good news indeed, but this year unfortunately it is horrible news. The economic meltdown caused by the draconian COVID-19 regulations on business and personal incomes, means that an earlier TFD is, paradoxically, very bad news for taxpayers and SA's economy. This is because people are earning much less than anticipated, so they will be paying less tax. That is why TFD will be earlier. How much earlier we can't say until the actual effects of lockdown on the economy have been measured.

Measuring the tax rate by how much of the year you need to work for the state, before you start to work for yourself, provides a graphic measure of how much SA citizens are taxed. If TFD is earlier in the year, then, under normal conditions, you keep more of the fruits of your own hard work. If it is later, the state takes more.

TFD on 6 May was estimated from anticipated government revenue, as presented by the Minister of Finance, Tito Mboweni in his 26 February 2020 Budget. Provincial and municipal revenues are not included in the Budget forecast by the Minister for central government. Zietsman said, "We need to add 30% to the central government revenue to get to the total "general" government tax revenue, and include other taxes, for instance property rates levied by municipalities. An important point is that the Budget is forward looking and this means that the numbers quoted by the Minister reflect his intentions and forecasts, not actual revenues collected."

Every year, Zietsman also calculates a second TFD. This is based on actual tax collected and actual GDP during the preceding year. For 2019, these were less than forecast. According to the South African Reserve Bank Quarterly Report of March 2020 general government revenue was 37,8% of GDP for the calendar year 2019. The result is that South Africans had to work more days in 2019 to achieve tax freedom. At the end of 2020 Zietsman will again calculate actual TFD, compared to his calculations based on the Budget.

He says we need to consider the implications of Government response to COVID-19. "We didn't work in April due to Lockdown. 2020 hasn't progressed as a typical year and this will have a considerable effect on TFD in that, for perverse reasons, it becomes earlier. If people earn less income and businesses are less profitable, even at the same tax rates, less tax is paid."

There is a potentially even more serious impact. Since the government will get less revenue and is spending more, it needs to borrow more. According to Zietsman, this amounts to, "A whopping half a trillion Rand extra and this must be paid back, with interest. The only way to do that will be by taxing you a lot more. In 2021, TFD will be much later in the year, probably in June, unless the State drastically cuts spending. This, as we know by now, is highly unlikely."

The longer we remain in Lockdown now, the further away TFD will be in years to come. Everyone pays direct or indirect tax because is "no free lunch." Increased interest payments on higher state borrowing is just one of the extra costs we are paying for the economic destruction of Lockdown, which is making the average South African more than 10% poorer. There are many more, both financial and humanitarian reasons why Lockdown should end now. As worldwide data show, poverty is a much bigger killer than the worst case COVID-19 scenarios. The Lockdown cost is just too great.

Ends

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