South Africa

South Africa basic income grant warning and tax implications

Implementing a basic income grant in South Africa, which has been ranked as the world’s most unequal nation, would slow economic growth and likely lead to the emigration of taxpayers, Intellidex said in a study.

South African President Cyril Ramaphosa and Social Development Minister Lindiwe Zulu have said the measure — which would be the biggest of its kind globally if implemented — should be considered to alleviate poverty. Business organizations have cautioned against it, saying it’s unaffordable.

Borrowing money to finance the payment, which depending on its structure and level could cost anything between 20 billion rand ($1.2 billion) and 2 trillion rand a year, is unfeasible given the state of South Africa’s finances, Intellidex said in the July 22 report. That leaves higher taxes as the sole way of raising the money, the group said.

South Africa’s taxes are paid by a relatively small number of people and companies, while its personal and corporate tax rank as the 24th highest out of 118 countries assessed by the OECD. Most of the proposals for a basic income grant would necessitate raising between 50 billion rand and 100 billion rand a year, the research group said.

“Some taxpayers may withdraw from the tax system altogether by relocating to jurisdictions where taxes are lower and/or where they feel they may receive a better return on the taxes they pay,” Intellidex said. “Emigration is a potentially serious threat to the medium- and long-run stability of the tax system.”

Intellidex estimates that personal income tax, the top rate of which is 45% in South Africa, would need to be raised by between 9% and 19% if it was used as the vehicle to raise the funds. Value added tax would need to be increased by 14% and 29%, meaning an effective increase of about 2 percentage points from its current level of 15%, while corporate tax would need to be increased by between 24% and 47%.

Hiking VAT would be the best option as the level is relatively low by international standards, Intellidex said.

More than half of South African households already get some of welfare payment and the country is ranked as the most unequal, for which data is available by the Thomas Piketty-backed World Inequality Lab.

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