Evaluating the design of tax-free investments to promote household savings in South Africa: an international comparison
Abstract
South African household savings have declined over the past 50 years and are currently at negative levels. The South African government has taken steps to ameliorate this problem by offering an incentive through the income tax system by way of tax-preferred savings accounts. The purpose of this study is to evaluate the design of this tax incentive in its ability to encourage South African taxpayers to increase household savings. This study is conducted in terms of the normative legal science discipline and identifies attributes or criteria which could serve as benchmarks for evaluating this new tax incentive to promote household savings. The study further evaluates the incentive against the design of an established comparable incentive from Canada. The evaluation found that, although the incentive has some mechanisms in place to encourage new savings, only a fifth of accounts opened during the first year of operation are estimated to be from new savers. While it does not disparagingly benefit wealthy individuals, the incentive does not contain any features to ensure use by low to moderate taxable income households (the target group). This study estimates that, owing to the design of the incentive where contributions are limited, the initial cost of the incentive to the fiscus will be significantly lower than the current interest-free exemption, and the real cost of the new incentive will only be borne by the fiscus in the future. It was also found that the new incentive is designed to be visible, simple, transparent and suitable. It is more equitable than its predecessor because it allows for a wider range of investments to be made tax-free. The incentive does not infringe on the certainty and convenience principles, but it remains unclear whether the incentive will be economically efficient and cost-effective. A comparison with the Canadian incentive revealed that it could be beneficial to allow for unused contributions to be carried forward, as this may lead to increased future savings. In addition, allowing replacement of withdrawals will likely enhance shortterm savings, as the current incentive is more suitable for long-term investment.