BATTLE OF THE BUDGET
Category General News
February 26, the National Budget speech, is drawing near, and Minister Tito Mboweni has asked South Africans to send him their ideas on how to grow the South Africa's economy. Myles Wakefield, CEO of Wakefields Real Estate, has a few thoughts.
We say it most years: this budget is the most important we've had since whenever. And we'll say it again this year, but few believe there could be a more important year than this.
South Africa isn't coming close to making ends meet - clearly visible in SARS' tax collection shortfall - but Mr Mboweni, the solution isn't found in the easy targets like property's capital gains tax or transfer duty.
For the past few years, focus has been on the lower end of the market, and the low to no taxation rate has achieved its goal - it's stimulated property in that sector, which has been excellent news.
But the upper end has been slowing and sluggish, and taxes are certainly a contributing factor. Take as an example, a R4 million property. That buyer will hand over to the government a sizable R273,000 in transfer duty.
What about Capital Gains Tax (CGT) since 2015 to today? For Individuals and Special Trusts, it's risen nearly 5%, from 13,32% to 18%; companies CGT rose 18,65 % to 22,4 %, and Other Trusts rose 10% from 26,64% to 36%.
Funding for the fiscus is not to be found at the upper end of the property market. It needs to be stimulated, not suffocated. Buyers in that sector are uneasy. They're weighing up their options. It's not what the country needs. This property sector harbours owners of companies and corporates which provide substantial employment opportunities. If those funds go elsewhere and don't remain in circulation, the result is no growth.
Please leave that property sector alone.
The so-called Laffer Effect or Curve describes it well. The Curve is based on the economic idea that people will adjust their behaviour in the face of the incentives created by income tax rates. Higher income tax rates decrease the incentive to work and invest, compared to lower rates. If this effect is large enough, it means that at some tax rate and any further increases in the rate, it will actually lead to a decrease in total tax revenue collected. For every type of tax, there is a threshold rate above which the incentive to produce more diminishes, thereby reducing the amount of revenue the government receives.
We believe we're at that point, or almost. Any further taxation of that key upper sector of the market, will backfire.
Mr Mboweni, make the tougher decisions, don't go for the 'easy' ones. The property market is a vital sector in the economy - from employment to investment - and if confidence is dented further, it will not bring in the tax revenue that's needed, it will not plug that gap.
Make the hard decisions. Stop the endless bail outs of SOEs. Stop the economic drain on our economy that the SOEs represent. Take action around the runaway public sector wage bill. Reign in corruption and expedite punitive action on those who're part of it. Be seen to make tough decisions.
Like her or not, Margaret Thatcher summed up rather well the situation in which we find ourselves: "The problem with socialism is that you eventually run out of other people's money."
We are running out of other people's money.
Mr Mboweni, respectfully, make the difficult decisions. Let South Africans and international investors see that our government has a bold plan that's achievable.
Author: Anne Schauffer