The standard answer is to quote SARS commissioner Oupa Magashula. In May he told the parliamentary committee on finance: “The average rate of personal tax has now reduced to 20.7%.”
But that doesn’t do it for most. They want to know the average rate across the board, including transaction taxes.
An extreme example is a super-tax taxpayer earning more than R617000 a year and then spending it all on smokes and booze. R100 is reduced to R60 by 40% personal tax. That will buy two packs of smokes. But the sin-tax component is another 50%. So it’s one pack for SARS and one for the consumer. That’s R30 of consumption per R100 earned. Inherent tax rate 70%.
Closer to reality is super-tax income spent on VAT taxable goods and services. Result: 47.4% inherent tax rate, assuming all income spent is taxed at the top marginal rate.
A taxpayer earning R1-million has an average personal tax rate of 32%. If all spending is on VAT-leviable goods and services, this rises to 40.4%.
Applying Magashula’s average personal tax rate of 20.7% and adding VAT, the average rate of taxpayers rises to 30.5%.
Even a social grant recipient has an inherent tax rate of an extra 50% if it is all blown on smokes and booze.
Depending on a taxpayer’s shopping basket, overall tax rates can rise if the basket includes luxuries, fuel and electricity. And if the taxpayer borrows to buy cars and houses, the results get ridiculous. “That’s not fair!” cries the taxpayer. “I’ve still got to live!” But fairness never comes into tax.
The point is, be careful of the tax rate inherent in the shopping basket. If you don’t spend, you contain your tax rate.
So, if you want to have a hot shower in the morning, don an imported suit, have breakfast at McDonald’s and smoke while schlepping the kids to a private school in a heavily taxed company 4×4, then yes, the average tax rate is frightening. But it doesn’t have to be. Just wake up and skip the shower, shave and shampoo. Hang out in pyjamas and neglect the kids. Switch on the laptop (a tax-free fringe benefit), breakfast on zero-rated mealiemeal, light up a sin-tax-free zol and get on with it. The average tax rate is then quite acceptable.
Originally published in the Sunday Times Tax Talk column.