“Tax Freedom Day” is a concept telling us taxpayers just how long we have to work every year to pay the Taxman his share before we start earning for ourselves.
Normally our “Freedom Day” gets later and later every year in line with the general trend towards more and more taxation, but 2020 as it turns out has been an exception. In fact this year it arrived signifcantly earlier than it did in 2019.
Why is this, and why is it bad news for us all? We discuss the answers to those questions in the context of the pandemic, the lockdown and the resulting economic crisis, with some (as you’d expect, rather gloomy) pointers to the future trajectory of our embattled economy.
“I Have Bad News and – No, Actually I Just Have Bad News” (Rick Riordan)
In the current year it has taken the average South African 126 days to pay off their taxes and only from the next day did the taxpayer then work for him or herself. This date fell on 6 May this year and is globally known as Tax Freedom Day (TFD).
So, what does this tell us?
This should be good news as last year TFD took 11 days longer to achieve than in 2020. However, this 11 day drop reflects the calamitous fall–off in the economy due to the COVID-19 crisis. Peoples’ incomes are dropping in 2020 which means less tax will be paid – this is the main reason for the 11 day improvement over last year.
This is not good news as the impact of lower taxes on government finances will push South Africa into a worse debt crisis. Some economists are predicting that our budget deficit to GDP will be 17% versus the 6.8% in the Budget presented by the Finance Minister in February – this shows just how fast our economy is tumbling. At least we are in good company – the USA shed 36 million jobs in the first seven weeks of their lockdown. Across the world, virtually every economy has slipped into recession.
The problem is it will take, depending on how long the pandemic lasts, some years for South Africa and the global economy to recover. This will not be good news for TFD, as taxpayers will probably be required to shoulder a higher burden of taxes to pay off the debt incurred due to the pandemic.
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)
