A better measure of CPI inflation

The government has in recent years aggressively raised the floor of the lowest personal income tax bracket. Over the six tax years from 2002/03 to 2008/09, government has lifted the lowest personal income tax bracket from R40,000 to R122,000. Basically it means that if you earned less than R40,000 you didn’t have to pay tax, while today you avoid paying personal income taxes if you earn anything below R122,000. This is a 205% increase over the period, or a compounded increase of 20% per year. See table 2.1 from SARS below.

But why? Consumer Prices as reported by the Stats SA/Reserve Bank haven’t increased by a third of this rate – see the chart below from the Reserve Bank showing its targeted measure of inflation: the rate of change in the consumer price index (CPI). The CPI rose by less than 6% every year from 2003 through early 2007, where after we had a spike above the upper-target band (6%) – so consumer prices as measured by the CPI are up way less than the tax benefits to the lowest earners.

Now shouldn’t this mean that people in the lowest income tax bracket are way better off in terms of their after-tax disposable income today than they were six years ago? They must be – R40,000 compounded at 5% annually over six years (as per the CPI) only takes you to R54,000, increasing the total annual non-taxable income for the lowest income bracket by R68,000, or 125%. There should also technically be fewer people paying taxes, but the data also shows this is not so. Furthermore, if the tax benefit is truly so large, why was so much of the household spending credit-driven, and not funded from savings over this period? Also, why were nearly all of the salary increases demanded by Cosatu and their unions in 2009 higher than CPI inflation? (Obviously Cosatu will bat for its members, but we reckon the main motive for the above-CPI inflation salary settlements are declining real wages)

Every year we hear about how the individual tax burden has decreased, hereby improving the disposable income of most taxpayers, particularly the lowest earners. Anybody who visits a shopping mall or Checkers store on a regular basis, or is faced with rising school fees, medical aid costs and other bills, such as having to pay the auto-mechanic on a monthly, quarterly or annual basis, will be able to tell you the CPI is a joke. And they would be right.

While we’ll leave the deconstruction and dispelling of the CPI myth to another day, suffice to say it is very clear the CPI measures the cost of living – not the cost of goods year in and year out. Governmental statisticians have all sorts of fancy ways to hide the real rise in prices, which serves to confuse people and business even further. It is this type of economic reasoning – the offspring of mathematical economics – that is causing a major disconnect between the ruling elites and the people. The people can sense something’s not right with the information it is being fed to appease them. This is a large part of why the violent flare-ups related to xenophobia and service delivery have jumped so sharply this year. ‘Something is wrong, but we don’t know what,’ has become the mantra of the poor. While the lowest earners get tax benefits year in and year out, they’re still faced with prices rising at a rate faster than the adjustment of their incomes. As a result, people can afford fewer quality goods, and have to cut back on discretionary spending, and sacrifice saving for retirement. It leads to increasing hand-to-mouth living, and depletion of wealth of the South African economy.  How much further this can run without killing the goose that lays the golden egg remains to be seen.

Watch the lowest income tax bracket ratchet significantly higher over the coming decade, all in the name of ‘tax benefits’ for the next-to-poorest people. In reality it is consumer prices that will run much higher despite deteriorating quality, leaving everybody except the ruling elites and well connected worse off.

The problem isn’t capitalism or the free market. The problem is the lack of economic freedom through continuous government intervention in the free market, distortion of statistical information, and the legalised expropriation of private funds through state taxation.