VAT is a regressive tax. Whether rich or poor, the amount we pay on a certain product as a percentage of its price is the same. The tax burden for a given product, therefore, forms a larger share of a poor person‘s income than that of a rich person. Increasing VAT will therefore make poor people worse off and will increase inequality.
The Davis Tax Committee (DTC) acknowledges this fact in its much anticipated first interim report on value-added tax (VAT) released last month. They find that “…an increase in VAT would have a greater negative impact on inequality than an increase in personal income tax or company income tax. Should it be necessary to increase the standard rate of VAT, it will be important for the fiscal authorities to think carefully about compensatory mechanisms for the poor who will be adversely affected by the increase. A range of measures should be considered, such as increases in social grants or the strengthening of the school nutrition programme”.
The tax committee report intimates that the rate of VAT may be increased in future in order to fund the proposed national health insurance (NHI) scheme. The report states “the Committee is cognisant of the fact that the fiscus may need to generate additional tax revenue at some point in the future. For example, if National Health Insurance is to become a reality, the tax to GDP ratio will need to rise quite significantly. To this end, the Committee requested the National Treasury to undertake a modelling exercise to investigate the impact of increasing the standard VAT rate from 14 to 17 percent…[in order to obtain] an additional R45-billion”.
Although some individuals might find the idea of raising VAT to fund NHI politically palatable, raising VAT is a bad idea as it will disproportionately affect the very people that it is supposedly trying to assist.A poor developing country such as South Africa cannot afford a nationalised system of healthcare given the increasing burden of disease, the small tax base, the antiquated infrastructure within the public health sector, the country‘s aging population, the inevitable increase in demand that will result from promised “free” health care, and the inadequate number of medical personnel. Nationalised healthcare will impose an impossible burden on taxpayers.
Since the August 2011 green paper on NHI, no official documents pertaining to the actual functioning of the NHI have been released. This is a massive problem because government has raised the expectation of “free care for all” and begun implementing the scheme in several provinces across the country. Due to the lack of detail, it is impossible to do an exact calculation of what the NHI will cost but if we use the Council for Medical Scheme‘s (CMS) average cost of providing Prescribed Minimum Benefits (PMBs) of R510 per person per month (R6120 per annum), with a population of about 54 million people, NHI will cost about R330-billion per year. When one considers that total revenue from personal income tax collections – South Africa‘s main source of tax revenue – amounts to only R311 billion, we get some idea of the futility of this ambitious proposal.
The government does not have to provide “free health care to all” and finance the healthcare needs of the entire population – this is a disastrous use of scarce taxpayer resources. Additional spending in any one area of the economy necessarily comes at the expense of spending in another. The more money government spends on healthcare, the less it will have available to spend on providing other critical services such as education, water and electricity.
When it comes to health care, government should concentrate its efforts and scarce taxpayer resources on the poor. For these individuals, government could act as financier but let them decide for themselves where to spend their money – and for those who can afford health care, leave them alone to seek out the cover that would suit them best.
An increase in VAT will not only retard economic growth and exacerbate South Africa‘s chronic unemployment problem but will also raise inflation and increase inequality – precisely the opposite of what is required to help the poor.
Author: Jasson Urbach is an Economist and director of the Free Market Foundation.
“This article first appeared in the Business Times on 2 August, 2015”