The middle class: It’s politics and taxes

2014-09-23 07:45

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Beginning last year, angry protests across the emerging world from Sao Paulo to Cairo and Istanbul signalled a wave of middle class protest.

Middle class frustration with the poor quality of services they received in return for their often substantial tax contributions was one factor driving these protests.

The middle classes make up the bulk of taxpayers but the inadequacy of state performance coupled with widespread corruption and a sense that they are unfairly bearing too much of the tax burden has created growing disenchantment in a number of countries.

On average, Brazilian citizens pay about 41% of their income in taxes yet infrastructure is often inadequate, public safety is a constant cause for concern, public health services are in short supply and often function poorly, and public education fails, on the whole, to deliver.

Increases in the price of basic consumer goods also created discontent against a backdrop of economic slowdown that threatens the new, “fragile” middle classes most.

In India, 33.2?million individuals pay tax, between 2% and 3% of a population comprising 1.3?billion people and 250?million households. Only 0.38% of these taxpaying individuals (less than 100?000 people) declare an income above $35?000 (R382?400) per annum.

Indian experts believe this means many thousands of Indians are either under-reporting their income or not reporting it at all. Most individual tax in India is therefore paid by a few honest high earners and the small minority of the workforce (about 10%) working in the formal sector.

This, along with the fact that many taxpayers feel they receive little or no benefits from the taxes they pay, is creating growing unhappiness.

The political repercussions were seen in the Delhi region elections last year, where 29.5% of the vote went to the new, anti-corruption Aam Aadmi Party; as well as in the decisive victory of the opposition BJP party in this year’s national elections.

Kenya currently collects the equivalent of 22% of gross domestic product in taxes, with the burden falling heavily on the lower middle class income brackets.

This trend has been reinforced since a widening budget deficit pushed Kenya’s government into finding additional sources of revenue, principally through VAT on previously exempt staple goods.

These new taxes led to widespread protests in 2013/14, sharpened by the knowledge that richer Kenyans have frequently found ways to avoid paying their full due.

In South Africa, direct taxation on individuals and businesses accounts for the bulk of state income (56.5% in 2012/13), largely drawn from individual income tax (34% of tax revenues), and that paid by corporations (20%).

Indirect taxes, principally VAT, contribute 26% and are paid by all, regardless of income.

Last year, just 5.1?million individuals (about 10% of the population) were required to submit tax returns with more than 95% doing so. These are the individuals on whom the direct tax burden, in the form of income tax, most immediately falls.

Their relatively small number contrasts sharply with the rising number of recipients of social grants (15.3?million last year), with social protection accounting for 16% of the national budget.

This skewed tax structure has resulted in what is often described as a heavy squeeze on middle class taxpayers. Financial commentators argue that the tax environment for lower and mid-level earners (the vast majority) has worsened considerably as income tax brackets have not been adjusted adequately to reflect the combination of higher local inflation and the depreciation of the rand.

The effect of this “fiscal creep” is that personal income tax rates for anyone earning below R1.5?million are reported to be “hopelessly uncompetitive by international standards”.

In contrast to many other developing countries, South Africa has a relatively tax-compliant middle class. But if government wants to avoid the global trends of growing discontent and tax avoidance by the middle class, it urgently needs to improve public services.

It is equally important to maintain taxpayers’ trust that their taxes will be used legitimately. To do that, corruption has to be reduced and the rules and regulations concerning corrupt practice must be applied to everyone, from the president down.

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