Low to medium-income earners who received inflation-adjusted salaries are forced into higher tax brackets, while those who were not eligible are also now paying taxes, a recent assessment by experts has revealed.
Simonis Storms’ assessment revealed that around 11 301 individuals could have become registered taxpayers as a result of bracket creep since 2010.
Bracket creep occurs when inflation pushes taxpayers into higher income tax brackets or reduces the value of credits, reductions, and exceptions. Bracket creep results in an increase in income taxes without an increase in real income.
Experts believe bracket creep will worsen inequality in the country and they advised policymakers to consider taxable inflation adjustments to partially assist in preventing income inequality.
“In such an unequal society, allowing bracket creep to occur further entrenches the poor and maintains income inequality,” the experts stated.
This is due to the observation that individuals at the bottom of the income distribution, especially informal sector workers whose wages grow slower, are more vulnerable to rising costs of living and now suddenly being eligible to pay taxes due to annual salary adjustments.
In essence, the experts explained that rising inflation and interest rates in recent months, coupled with paying taxes as bracket creep progressed over recent years, all combine to place lower-income individuals in a worse financial condition.
“We have heard numerous accounts of gardeners, security guards, cleaners and domestic workers, among others, who are now eligible to register and pay income taxes which should not be the case,”the experts said.
This narrows the disposable income of individuals further, leaving them with few dollars to spend on their basics and wants, coupled with rising inflation in absolute value they have few dollars with less purchasing power.
Consumption spending is roughly 70% of GDP in the long run, with Simonis Storms’ experts indicating how crucial consumption is to the overall economic activity in Namibia.
However, with rising costs of living and tighter monetary policy during 2022, unadjusted tax brackets are limiting potential consumption spending by lowering the disposable incomes of individuals by also taxing them due to bracket creep.
“We view bracket creep as a serious policy failure that needs to be addressed,” they pointed out.
According to the assessment, Namibia minimum taxable income has not been adjusted in over the last eight years until the recent mid-term budgetrbeview of 25 October 2022.
This implies that low-income individuals who have been receiving annual inflation-adjusted salary increases have become eligible taxpayers in recent years.
A comparison that was made with neighbouring South Africa and Botswana shows how the two countries have been considerate and keep up with inflation changes.
The assessment revealed that South Africa has adjusted its minimum income tax threshold by 4.0% on average each year between 2011 and 2022 when inflation averaged 5.0% each year.
The minimum annual taxable income in South Africa increased by 60.1% between 2010 and 2021, from N$57 000 to N$91 250 currently.
Botswana increased their minimum tax threshold in 2021 – for the first time since 2010 – from 36 000 Pula to 48 000 Pula (about N$64 320 at current exchange rates).
In Namibia, the minimum annual taxable salary was increased from N$40 000 to N$50 000 in 2014 and has remained unchanged since then.
According to Simonis Storm experts, this was a 25% adjustment, while the cumulative rate of inflation amounts to 47.5%- implying that the adjustment from N$40 000 to N$50 000 was inadequate.
This is because “it does not account for inflation in the last eight years and does not prevent bracket creep”.
Only recently, did the ministry of finance decide that it will increase the minimum income tax threshold to N$100 000, effective for the next financial year.
INCOME TAX PERCEPTION
The Afrobarometer survey conducted at the end of 2019 and released in 2020, has provided some insights into the average Namibian’s perceptions of income tax.
According to Simonis Storm’s analysis of the results, 34.1% of Namibians find it difficult and 35.9% find it very difficult to find out how the government is using tax revenues.
This is evident in an information gap, where the state’s budget and its allocations are not known to a third of the population.
Furthermore, 34% of Namibians think that ordinary people are taxed “about the right amount” and about 35.9% of Namibians think they are taxed too much.
The latter view could well be supported by bracket creep effects, wrote the experts.
The survey results have also revealed that 56.9% of respondents believe that small traders and informal sector businesses should not be taxed by the government.
Some are also free-riding, as about 32.1% either often or always avoid paying taxes.
Furthermore, 59% of respondents believe that it is fair to tax the rich and assist the poor and about 32.1% believe that the rich are not taxed sufficiently.
Simonis Storm experts have also highlighted how trust in government has been declining.
Stating that the loss of trust can lead to a myriad of consequences, one of them being a lower willingness to pay taxes.
Moreover, a lower willingness to pay taxes could also be due to higher costs of living and bracket creep effects.
The Simonis Storm experts added that the perceptions on tax in Namibia are leaning towards a negative view, where plenty of Namibians do not see the benefits of expenditure emanating from tax revenue and feel that their tax burden is excessive.
The experts have highlighted that income tax revenues from individuals at the lower end of the income distribution are limited.
At the same time, government and private companies run the additional cost of having to register, audit, and collect income taxes from lower-income earners.
“This is an inefficient use of the time that yields low financial returns,”the experts pointed out.
The experts advised the policymakers to adjust the income tax tables for inflation to prevent bracket creep and to restore the spending power of lower-income earners.
Consequently, consumer spending can increase and support the informal economy and Small and Medium-sized Enterprises (SMEs) which typically assist in creating jobs in lower-income areas.
In this way, money circulation is maintained within the informal system, the experts said.
The Simonis Storm experts added that the tax table inflation adjustments can also partially assist in preventing income inequality from spiraling out of control, which normally leads to all sorts of social tensions and fractions in societies.
With the announcement of an increase in minimum taxable income, “we hope that this is implemented and gazetted as soon as possible and that the implementation does not get dragged out for too long as has been the case with many other tax change announcements in the past i.e. increased pension fund contribution”. Email: firstname.lastname@example.org