Tax and Livelihoods

While taxes are guaranteed to apply to everyone, they do not have to painfully catch us off-guard. Today, we look at how we can expect crisis led tax variations to affect our livelihood and financial activity.

For the greater good of the country’s governance, tax is very important. It allows the government to run the country well, and cater for its citizens. Taxpayers residing in South Africa are taxed on their income irrespective of its source, and non-residents are only subject to domestic taxes. These contribute to the central government revenues that are primarily made up of the mentioned income tax, value-added tax (VAT) and corporation tax, with each form of tax affecting the citizens of the country differently. Unlike a progressive income tax, in which higher-income individuals pay a higher percentage in taxes, a VAT is a flat tax where all consumers regardless of income pay the same percentage. The income tax is useful in bridging the income gaps, as one is taxed based on what they make, hence their tax bracket.

There are several reasons why different taxes are proposed, and the ultimate of them is revenue for the government. As an example, let’s look at the proposed tax on sugar-sweetened beverages driven by ambitions to reduce obesity in the country. Ideally, it is good to combat obesity statistics by increasing the tax revenue, but what are the general impacts of the proposal to the livelihoods of the citizens? With increased tax rate, the production, supply, and demand becomes affected as prices change to incorporate tax, leading to a threat to jobs and the local economy. This explanation shows that while tax is good for revenue, if its costs are more than said revenue, it should be opposed.

How inequality amplifies the effects of Tax

South Africa being a developing country with great inequality among its citizens, the livelihoods of people get affected differently. Some just lose profits without their everyday lives being largely impacted, while others lose their only source of income, and are given the hard lesson on the need and value of setting up multiple streams of income. This is more the case in the current lockdown conditions due to the hidden costs of South Africa’s coronavirus bans. Though the bans are measures to mitigate the number of deaths caused by the virus, as necessary as they are, they come with a huge impact on the economy of the country, which in turn affects the livelihood of the people. To date, most small businesses are not operating, and employees lost their jobs. Due to that, it is expected that the total gross tax revenue will be down by a significant value.

In short, South Africa will lose more in tax revenue, and further lose from funds borrowed, from the International Monetary Fund and African Development Bank combined, in interest payable. Additional billions in taxes need to be raised over the next few years, so that people at the lesser end of wealth distribution can have decent livelihoods and a better local economy. With that expected, the tax rates have to increase.

Further illustrating the impact of increased tax on everyday lives is how, long before salaries are adjusted, price increases would have hit hard on the pocket of citizens. And because there is not enough for one to save or even invest, that results in a slow-growing economy. Ultimately, individuals are the ones placed in a non-sustainable financial situation. However, if the government fails to collect enough taxes from the public, then it won’t be able to finance its expenditure, which, to roughly 20% of South Africans, is the main source of income.

The government has to find other means to finance those expenditures, and that will put the country’s economy in a deficit worse than it’s already in. It is in the best interests of the public to benefit from a financially fit mindset and understand how taxes affect their lives, whether negatively, positively or holistically, as the more we are informed about the country’s economic state, the better financial decisions we can make.

Financial Fitness to weather storms

This is why it is the burning passion of the finance gym to strengthen the financial muscles of the people by setting the financial literacy foundations, through our events and insightful articles, aimed at making you more financially fit on your way to financial freedom. For more ways to invest in your financial literacy, be sure to subscribe to our newsletter below, and catch us on social media channels such Facebook and Linkedin, as we interact with you and others on the road to financial freedom.

Author: Olebogeng Seribe

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