Carrots only for compliant taxpayers

I AM hugely impressed with the latest South African Revenue Service (SARS) “Thank you” media campaign.

Compliant taxpayers hear so much about corruption that it hits a good spot to see the success stories. Management through acknowledgement and reward is always far more civilised than threats and penalties.

Were it not for employment created by the informal sector, the housing and public works programme and the social welfare grant system, South Africa would have burnt to the ground ages ago. Compliant taxpayers have funded most of this.

The 2012 SARS tax statistics reflect that 94% of individual taxpayers have submitted their 2011 tax returns. So the “big stick” approach has worked – despite many moans from compliant taxpayers, who take offence at being threatened along with tax defaulters.

Back in the old South Africa, we joked that the minister of finance thought fiscal drag was a revenue inspector in a cocktail dress. Fiscal drag (bracket creep) adjustments had little place in national budget speeches and the middle class was thumped with an ever-increasing effective tax rate. This was the only way to finance a broke economy, other than borrowing excessively. And they did that as well.

The biggest single achievement of the Trevor Manuel era was keeping inflation out of personal tax rates through an annual tax bracket adjustment. This costs the national budget R4-million to R10-billion a year and has reduced the average rate of tax for all individual taxpayers from 33.8% in 1994-95 to 17.8% by 2011-12.

But the national budget could never afford fiscal drag adjustments were it not for the increased level of compliance by the majority of taxpayers. Thus annual fiscal drag relief across the board is allowing the non-compliant taxpayer to ride on the back of compliant taxpayers.

There must be an automatic fiscal drag adjustment for all employed taxpayers earning below R120000 a year. But the adjustment (or at least a component thereof) should be granted to taxpayers only on submission of a tax return on or before the due date.

The above would leave the non-compliant taxpayer not only paying the new non-compliance penalties, but also paying taxes at a higher rate.

Originally published in the Sunday Times: Money & Careers Tax Talk column.

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