GROUNDUP OP-ED
Yes, we can afford a Universal Basic Income Guarantee
Political will and strategic taxation channels could help bridge the yawning divide between the haves and the have nots in South Africa.
First published by GroundUp.
Aliya Chikte is a Research Associate at the Institute for Economic Justice, where Gilad Isaacs is the Director.
The reinstatement by President Cyril Ramaphosa of the Covid-19 social relief of distress grant and its extension to caregivers take us one step closer to a universal basic income guarantee.
The Covid-19 pandemic has placed the idea of a Universal Basic Income Guarantee (UBIG) back on the agenda, as can be seen from the numerous demands from civil society groups and community organisers. This recognises, in the context of a long-standing structural unemployment crisis, that poverty and inequality cannot be addressed only through expanding employment.
However, the SRD grant of R350 per month can, at best, cover only 60% of a person’s minimum required food intake. In the short term, the SRD grant should be increased to at least R585, which is the food poverty line. This would cost an additional R17-billion until March 2022. The inadequate amount and the delays in implementing this are reflective of a government whose social policies have become reactive and crisis-driven.
A permanent UBIG is a chance to close the gaps in South Africa’s social security net. The question is then not about whether a UBIG should be implemented, but rather how it should be designed and financed.
To answer part of this question, the Institute for Economic Justice (IEJ) has put forward a financing policy brief for a UBIG, outlining 19 recommendations that will allow South Africa to raise funds to tackle poverty. The policy brief serves as a supplement to an earlier one on UBIG published by the IEJ in March 2021 and a summary of further research produced for the IEJ by DNA Economics. The proposals include adjustments to income taxes, consumption taxes, and wealth and property taxes; removal of corporate tax breaks; the reduction of wasteful and irregular expenditure; and the recoupment of expenditure on UBIG through existing value-added tax (VAT).
Responding to South Africa’s extreme levels of inequality, all financing proposals are progressive and therefore remove or limit fiscal measures that currently disproportionately benefit the wealthy.
How much and for whom?
There are numerous suggestions for the amount at which a UBIG should be set. We present a set of options, ranging from the food poverty line of R585 per month to the initial starting level of the national minimum wage of R3,500 per month. These amounts are not, on their own, sufficient to provide a dignified standard of living, but rather seek to address the depth and severity of poverty by meeting people’s most basic needs.
The preferred approach is one of universality, allowing all people between the age of 18 to 59, currently excluded from permanent social security benefits, to be eligible for the UBIG. In tandem, if South Africa is to reach the National Development Plan’s objective of reducing poverty to 0% by 2030, then the child support grant should also be increased to at least the level of the food poverty line.
The universality ensures that lower-income taxpayers will benefit more from the income guarantee than they contribute in new taxes. The net benefit varies according to income brackets. For example, if a UBIG of R585 per month is provided, 84% of taxpayers will be net beneficiaries.
How to finance this?
The IEJ puts forward 19 tax proposals. These are options, and are not necessarily proposed as a package to be implemented simultaneously.
Adjustments to income taxes include:
- The implementation of a ring-fenced Social Security Tax on income, operating similarly to Unemployment Insurance Fund (UIF) contributions. This will generate R67-billion annually. It would be progressively levied upon all income earners — ranging between 1.5 to 3% of taxable personal income;
- A resource rent tax levied on excess profits earned by extractive industries, estimated to bring in R39-billion annually. This would redistribute the gains from commodity booms while preserving incentives for investors;
- The removal of tax breaks for high-income earners — in the form of medical aid tax credits and the pension fund contribution deduction — could contribute a total of R26-billion annually; and
- A halt to the National Treasury’s proposed reduction in the corporate income tax rate. In the context of pressing social needs, this reduction would be deeply irresponsible.
Proposed changes to taxes on products consumed include the introduction of a VAT rate of 25% on luxury goods; a temporary increase in excise duties; and an increase in carbon taxes to one-quarter of the European Union standard. We estimate that changes to such consumption taxes will result in an additional R13-billion that can be used to finance a UBIG.
These provide good revenue-raising options but do not tax accumulated wealth. For this reason, we propose a wealth tax. Though South Africa has one of the highest levels of wealth inequality, a wealth tax has historically been excluded from the tax framework. Using the wealth tax simulator from the World Inequality Database, we show that a 1% wealth tax for the top 1%, and a 3% wealth tax for the top 0.1% would generate R59-billion in revenue in the medium to long term. While a wealth tax is not an immediate source of financing, it is an important proposal to ensure the sustainability of a UBIG.
It is also possible to tax the income that derives from wealth, which is also highly unequally distributed. A currency transaction tax (CTT) of 0.005%; raising the Securities Transfer Tax from 0.25 to 0.3%; and a financial transaction tax of 0.1%, would raise R3.68 billion, R1.37 billion, and R41 billion respectively. These tax the buying and selling of different financial assets and have the benefit of reducing stock market speculation.
An increase in the estate duty tax would mean higher taxes when wealth is passed on after someone’s death. The proposal would align the tax to personal income tax rates, ensuring greater equity across the tax system. Given the skewed nature of accumulated wealth under apartheid, this seems necessary.
This combination of taxes on wealth and income that derives from wealth would add R48-billion to government revenue.
In addition, we propose scrapping ineffective corporate tax breaks — such as the employment tax incentive — and redoubling efforts to tackle tax evasion. The IEJ tax proposals target a 25% reduction in profit shifting of multinational corporations. Combined, this would free up a total of R18-billion in additional revenue. We also target a 30% reduction of irregular expenditure reported by the Auditor-General, freeing up R36.4-billion. A further reduction of wasteful expenditure in Cabinet and government departments would provide an additional R1.85-billion.
Spill-over effects
A UBIG would spur a host of positive spill-over effects in the economy, including shifting unspent funds from the wealthy and corporates to poor households, thus injecting spending into the economy that favours locally produced goods. This would also increase tax revenue as the economy grows. These all need to be investigated. One easy element to calculate is that around 12% of any expenditure on a UBIG would be recouped back by the state via VAT.
This array of financing proposals shows that implementing a UBIG progressively and sustainably is feasible in the short term. Furthermore, some funds could be raised through additional debt, or other avenues.
A UBIG is an important component of a broader package of social support that a capable state should ensure for all. The urgency of the moment, in addition to the longstanding persisting patterns of poverty and inequality, needs to be recognised and reflected in the debate around the implementation of a UBIG. Addressing extreme poverty is therefore not simply about financing constraints, but rather about willingness to take the immediate measures that this moment demands. DM
Aliya Chikte is a Research Associate at the Institute for Economic Justice, where Gilad Isaacs is the Director.
Views expressed are not necessarily those of GroundUp.
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Let’s start with eliminating all irregular and wasteful expenditure instead of 30%
That frees up R100b, makes the other additional taxes unnecessary and is something that is the RIGHT thing to do.
As to the recommendations, some make sense but most are simply unaffordable or have chaotic consequences.
Take away deductions for pensions : who will provide the capital for investments when pension savings disappear?
Yes, remove leakage and inefficiencies in tax collection. But we are way over-taxed as things stand.
Without liquidity, how does one pay a wealth tax? Sell assets to pay tax? A death tax already means the kids that inherit a business must find liquidity that does not exist – sell a third of the business or take on debt to pay death tax???
The proposal seeks to extract an unnamed total but seemingly R200billion per year from 1.6m actual taxpayers.
Where must we get R10,000 more per taxpayer per month from to give away – generate it somehow? The assumption is that we will have to learn to make do with R10,000 less per month I suppose.
Let’s learn from our Comrades in China and start a one-child policy. Or is that taboo?
Agreed. When I saw “eliminating all irregular and wasteful expenditure” I thought of all the powerful and connected ANC cadres that will not like this.
The concept of a UBIG is nice to have in principle, but really only something an already wealthy and developed economy can afford. SA certainly cannot with only a small fraction of its population paying tax. To tax them further is just lazy socialism.
It’s just daydreaming pie in the sky with no attachment to reality.
A ring fenced social security tax – like somehow because it’s ring fenced and for social security it means people can afford to pay it? Somehow that means it magically won’t result in reduced economic activity, lost jobs and ultimately way less tax collected than expected?
A resource rent tax on extractive industries.. like mining.. yeah that really needs yet another tax to make it a vibrant job creating industry! Great idea! maybe if the mines automated everything they could afford that tax…
Oh yes – let’s remove tax breaks which are there for very very good reasons (like.. to encourage saving for retirement so that old people are less of a burden on the state, and..you know.. to keep the working population healthy so they can continue to work and generate tax revenue).. brilliant ideas
As for the corporate tax reduction, what a great bogeyman to go after – most people don’t realise this means their pensions will ultimately be worth less (and probably worthless too if this insanity continues), leaving even more people dependent on a broke and broken state. And why not hobble business even more from investing and creating jobs while we’re at it since it seems the ultimate goal here is to make everyone a mindless serf enslaved to the overarching Soviet Era state that tells you what to eat, what to do and what to think – fantastic!!!
This article is completely out of touch with reality.
Of course, we must care for the poor and hungry as a matter of priority.
But Aliya Chikte’s solution to achieve that solely through more taxation and borrowing is not sustainable and will, in short order, push many more people below the poverty line and doom SA to become a failed state even more quickly than our present trajectory suggests.
So, do as much as we can currently afford to relieve this grinding poverty but do it alongside reform of the economy that will generate more real private sector jobs.
This is a very helpful outline of current proposals for a UBIG, thank you.
I fear it will run headlong into the conservatism of most South Africans (as the comments here already suggest) who mostly adhere to outdated economic simplifications and believe that a UBIG would be a “handout that increases dependency”.
No – we have a failing economy and society, and a UBIG will give people the chance to start rebuilding their lives, and the economy, from the ground up.
People argue that we’re overtaxed, but this is not true. Our problem is that we don’t see our taxes creating sufficient value.
South Africans continue to see extractive industries – mining – as the solution to our problem, and rarely understand that they are the source of much of our problems, the ‘resource curse’ is that over-dependence on extractive industries brings a host of social and economic problems. Mining is not our saviour, it’s our eternal nemesis, begetting everything from gangsterism, gender-based violence, pollution, HIV, climate breakdown and corruption.
People forget that it costs money just to get a job or start a business. If you’re stranded in a remote community or township, you need money for a phone, for internet, for getting to job interviews, for clothes and transport before you even have a chance of finding work.
A pity people expect the same old failed solutions – cut taxes, cut government spending, cut regulation – to generate prosperity, when these policies have failed so often.
Thank you for your comment. Well said.
David,
It is easy to write off opposition to these proposals as “conservative”, and not in a positive way.. I have not been described as conservative in my life; many other things but not conservative. I have nothing against conservative, people are entitled to their opinions. This plan does not even include a basic table of grants, people, costs over time and validated sources of income to fund the plan. It is inadequate and fiscally irresponsible.
Find me support for these proposals among people that actually produce goods and services (that others will pay for) for a living. These ideas come from groups that spend their time thinking, theorising, postulating and spreadsheeting – probably themselves funded by grants or philanthropy.
Are all productive people therefore “conservative” (in a bad sense of conservative)?
Anyway, just tired of everything being somebody else’s fault or problem, mostly people like me. Shrug
Johan, if you feel slighted, my apologies. My response really was general and not focused on your comments.
Conservatism can be good when preserving things that are good, and bad when preserving things that are not working, such as the conventional but failing economic prescriptions that the SA media feed us from corporate economists who care mostly about corporate profits.
Corporate profits are fine when they add social value and are well-distributed, and bad when they are built from ignored externalities and go only to a few, which is unfortunately mostly how our economy works, the mining industry again being a prime example of an industry that often destroys more value than it creates through pollution, especially CO2, and general environmental and social degradation. Our society doesn’t properly count these costs – and then we’re baffled why we never get ahead, like a driver whose car won’t accelerate with the handbrake still on.
I agree that wasteful expenditure should be curtailed – where do you get your R100 bn figure from?
The tables that you are asking for are in fact linked from the article.
The link comes back “page not found”
Article says stopping 30% of irregular would save R30b, hence R100b
I don’t need convincing on CO2, am mostly solar. I can’t agree on general statements that extractive is bad. Without those, we would be in the stone age – think of just technology in health care. If mines are held to account, e.g their rehab funds, then they add value and are an enormous employers.
I am frustrated by the prevailing attitude that rich is bad and we must redistribute so that the poor don’t loot and burn. That attitude is extremely insulting to the millions of poor but decent folk that did NOT loot and burn. Rich is relative but is also for most people people a byproduct of success / achievement = not the goal. (Most, not all)
Redistribution will NOT work because of the law of large numbers. If we took away 75% from the wealthiest 1000 South Africans we might gather R250b. Lekker. Now share that among 50 million people? R5,000 will not touch sides, it is six weeks’ minimum wage. And then? Do same for the next 10,000 wealthiest?
Who will employ the nation when the rich mainly white pigs are no longer there?
Ruthless, but we should have implemented a one child policy in 1994. We would be 20m fewer miserable souls today. A far better way to lift average standard of living, but in SA this is taboo even if our Chinese comrades used it. It is not too late if we start now. Might prevent a failed state.
A one-child policy would be enormously damaging to human rights, and not work nearly so well as a combination of properly educating women, ensuring access to reproductive healthcare, and economically empowering them (back to the UBIG).
Please expand why a one child policy is damaging to human rights? I am not talking forced abortions. A policy that attaches consequence to choices in other words. You can have 5 kids, but then…. Rights come with obligations.
Our comrades in China did it and we did not march against their violation of human rights?
You promote sustainability in energy but not in human reproduction?
Sorry, you probably won’t spot this now, but it’s damaging to human rights because forced abortions as you correctly observe are wrong, but also, women don’t always have full control over their reproductive lives, and so economic measures that punish additional children that women may not have chosen to have in an ideal world are also unfair. Best to create an environment that makes it easy for women to choose how many kids they have – full economic and social empowerment, and access to birth control – and in those circumstances, evidence suggests populations naturally stabilise and decline.
Before wasteful expenditure and corruption is addressed properly, any increases in tax is madness…so no, currently we cannot afford it. As for the medical tax breaks, what about the other mad idea, NHI?
Here is a start : almost everywhere in this country is polluted. Pay people grants per load of sorted plastic, glass, metals. Recycling’s upstream supply chain can sustain tens of thousands of permanent jobs.
When we are done with waste, there must be many more socially beneficial projects one can tackle that also create permanent jobs and skills. Infrastructure projects, community farming (produce for yourself and your community), child care for working parents, etc.
Anything but hand-outs to people sitting at home!
Demeaning jobs? If we sit around thinking we are going to create R250k per year, 4IR, glamorous jobs for 12 million people we will be sitting thinking about solutions for 20 million people soon.