NHI will increase personal income tax by 115%

To fund the government’s National Health Insurance (NHI) Act, personal income tax contributions would need to increase by 2.2 times. 

This equates to a 115% increase in tax from the current average rate of 21% to an average rate of 46% of income. 

As a result, the NHI Act is fiscally impossible, as such a severe increase in personal income tax would crush the local economy. 

This was revealed as part of the Health Funders Association’s (HFA) legal challenge against the NHI Act, with the organisation calling it unaffordable, unworkable, and unconstitutional. 

As part of its preparation for the legal challenge, the HFA commissioned an analysis of the financial implications of the NHI Act by Genesis Analytics. 

Genesis Analytics is a global economic consulting firm that has developed a financial model to assess the viability of the NHI Act under various assumptions. 

The HFA also asked Genesis to determine a viable pathway towards a workable NHI that would not cripple South Africa’s finances. 

“The report, released today, unequivocally demonstrates that the NHI Act requires unsustainable tax increases while reducing healthcare access for medical scheme members,” the HFA said. 

The analysis found that the NHI will result in some efficiency savings compared to the current system, with savings of around 45% of private sector cost levels. 

However, this shows that even under the most optimistic assumptions, it is not possible to raise the funds required for the NHI sustainably. 

For the NHI to fund a level of care equivalent to what medical scheme members currently receive, the analysis showed that personal income tax would need to increase by 2.2 times. 

This translates into a 115% increase in tax rates from the current average rate of 21% to an average of 46% of income. 

This would push marginal tax rates in the lowest income bracket from 18% to 41% and the highest bracket from 45% to 68%. 

While VAT is not mentioned in the NHI Act as a means to raise funding, the estimated increase in the tax to fund the scheme would be around 20%, taking VAT from 15% to 36%. 

Even pooling together all existing healthcare spending, both public and private, would require personal income tax to rise by 1.5 times its current rate – a 47% increase in tax rates. 

Simultaneously, private medical scheme members would face a 43% reduction in the level of healthcare services relative to what they currently receive. 

Tax hikes will wreck South African economy

These severe tax hikes will cripple South Africa’s economy, with its narrow tax base of 7.4 million individuals already being squeezed to fund government spending. 

The increase in spending under the NHI will result in health expenditure accounting for 22% to 33% of total government spending, which is significantly higher than any global standard. 

This would also crowd out spending in other critical areas, such as peace and security, economic development, and social grants. 

“The steep tax increases required to fund the NHI will reduce disposable income, curb consumer spending across all sectors of the economy, and may trigger an exodus of high-income taxpayers,” the HFA said. 

South Africa’s largest private medical aid provider, Discovery, has done extensive analyses of the funding required for the NHI to be implemented. 

The Act, as it has been signed into law, would prohibit private medical aid providers from covering healthcare procedures that are already covered by the NHI. Companies such as Discovery would only be able to cover complementary services. 

Discovery CEO Adrian Gore said this is simply unworkable and unfeasible, given the vague definition of complementary services and the unconstitutionality of the Act. 

“This is a complex issue. It is an intergenerational process that will take time, but it is a problematic piece of legislation,” Gore said. 

However, his main concern with the NHI is its lack of funding and the potentially disastrous impact it would have on the South African economy.

“We have been unequivocal as business, as Discovery, and as a sector, that the NHI is unworkable without private sector collaboration,” he said. 

“There is just not enough funding available if the NHI is imposed in a draconian form that excludes private medical aids.”

Discovery’s calculations show that if private medical aids are excluded from funding healthcare procedures in South Africa, the government would have to impose massive tax hikes to fund the NHI. 

 The Department of Health has confirmed that tax increases and other tax changes are on the cards to fund the NHI. However, it is not clear which taxes will be raised or if a new tax will be introduced. 

The company outlined the tax increases necessary to fund the NHI, which would require approximately R200 billion in additional funding each year, according to the Department of Health.

• A 31% increase in personal income tax or
• A 6.5% increase in VAT or
• A ten times increase in payroll tax

This is unsustainable for a country with an extremely small tax base, which is already being squeezed to raise revenue for the government. 

“That would wreck the economy and does not do enough for anyone. You need more funding,” Gore said.

“It’s not a healthcare issue – it creates a real economic problem. I don’t think people would bear paying 30% more taxes and having 70% less healthcare.”