Thursday, February 27, 2014

2014-Budget: Tax relief once again an illusion

As Solidarity warned last week, Finance Minister Pravin Gordhan’s announcement of tax relief was once again misleading. Gordhan’s announcement of personal income tax relief amounting to R9,25 billion in his budget speech once again did not constitute real relief. As the case was last year, taxpayers will have to cede a larger portion of their income to income tax this year.

Piet le Roux, senior economics researcher at the Solidarity Research Institute, said that any taxpayer receiving a salary increase in 2014 in accordance with CPI inflation, will actually have to forfeit a larger portion of his taxable income to personal income tax than in the 2013/2014 tax year. Only taxpayers receiving an increase of less than 5,4% this year - therefore, those becoming poorer in real terms – will cede a smaller part of their taxable income to personal income tax. For the 2014/15 tax year, the tax threshold and all income tax brackets have been increased by approximately 5,4%. This is significantly lower than the Reserve Bank’s expected increase in the consumer price index of 6,3% for 2014. These adjustments will in fact result in a heavier tax burden, not tax relief.

Le Roux said the following example is an illustration of how the tax relief announced this year is illusory. According to Gordhan, the ‘tax relief’ he has announced would especially benefit those receiving an income of less than R250 000 per year. ‘During the 2013/14 tax year, someone who earned a taxable income of R250 000 a year, would have ceded almost R38 800 or 15,5% of his income to personal income tax. If his income remains constant from the 2013/14 tax year to the current tax year, he would pay around R37 600 or 15% of his taxable income in personal income tax in the 2014/15 tax year. It is this decline that is called ‘tax relief’. This implies, however, that the taxpayer’s income does not even keep pace with CPI inflation. In other words, to receive the benefit of the tax relief he would have to become poorer. If his taxable income only just keeps pace with CPI inflation, increasing by 6,3% to R265 750, he would pay around R41 500 – or 15,6% – of his taxable income for personal income tax in 2014/15. This is more than the 15,5% he had paid in 2013/14 – his tax burden has, therefore, become heavier and has not been alleviated.

VIA Piet le Roux Senior economics researcher: SRI Cell: 082 556 3405

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