This is the 22nd year I have covered the national budget speech. I watched Trevor Manuel do some great stuff, but nothing approaches the wisdom Finance Minister Pravin Gordhan displayed in parliament this week.
PG had his back to the wall. The R10-billion VAT shortfall was inevitable. And the loss of revenue caused by dividend tax implementation on April 1 set the numbers back another R10-billion. He was R20-billion down for starters.
Nobody ever thought PG would force company tax to the rescue.
Manuel favoured companies, reducing corporate tax rates and dropping the secondary tax on companies (STC) to 10%. Corporate tax collections fell from nearly 30% of the total tax collection 10 years ago to 21% today.
Manuel's dream of appealing to the foreign investor had as much effect as throwing a muffin at a black hole. And the individual taxpayer had to pick up the slack, with personal tax growing to 36% of the total and VAT to 28%.
To be fair, corporate tax and STC saved the day in the 2011/12 numbers, cancelling out the shortfall on VAT (R10-billion) and individual tax (R3-billion).
PG is unpredictable. Some pundits thought he would recover the shortfall created by dividend tax implementation by stiffing the individual taxpayer again. It would have been so easy to simply cancel or postpone the new dividend tax exemption granted to retirement funds.
But no. The shortfall is to be recovered by increasing the rate to 15%.
There is a double whammy. PG also increased the capital gains tax (CGT) inclusion rates for corporations from 50% to 66.7%.
Prima facie, it simply increases the effective rate of CGT for companies from 15% to 18.67%. So what? But when a company capital gain is distributed by way of dividend, 15% dividend tax is imposed in the post-tax distribution of 81.33%. That's a further 13.33% tax charge. The result is an effective tax rate on capital distributions of companies of 32%, compared with 22% pre-budget.
Maybe this will encourage companies to reinvest capital gains rather than return capital to shareholders. There is much merit in that.
But you can be certain that there will be some pretty substantial dividends paid in March 2012 prior to the new rate and dividend tax implementation.
- Lester is a professor at the Rhodes Business School, Grahamstown. See www.criticalthought.co.za