With tax very much in the news at the moment, it is probably opportune to explain one of the more confusing issues of tax the issue of marginal versus average tax rates.
A large number of people often assume that they are paying what is their marginal rate of tax. For example, people at the top marginal rate of R100 000 a year are often under the impression that they are paying tax at "45 percent" of their incomes.
This is not correct. To explain why not, I need to illustrate the difference between "average" rates of tax and "marginal" rates of tax.
Firstly, average rates of tax will always be lower than marginal rates of tax. The average rate of tax on someone earning a taxable income of R100 000 is 34,2 percent.
But, and this is where it becomes confusing, at a marginal rate of tax of 45 percent, the taxpayer will pay 45c out of every additional R1 earned over R100 000.
So, while someone might be paying a marginal tax of 45 percent at, say, a salary of R100 000, the average is still somewhat lower. In fact, no one pays an average rate of 45 percent on his or her income, no matter how high the income.
Perhaps an example is needed to illustrate this point.
A taxpayer earning R120 000 pays tax of R43 200, according to the 1996/97 tax tables. The tax paid calculates at an average rate of 36 percent.
Now the taxpayer gets a salary increase which puts his or her taxable income at R150 000.
The tax payable is now calculated as follows: R34 200 on the first R100 000 plus 45 percent tax on R50 000 (the tax payable on the income in excess R100 000 equals R22 500).
With total tax payable of R56 700 the average rate has crept up to 37,8 percent.
Even at a salary of R1 000 000, the average rate still remains below 45 percent. Someone earning such an income will pay tax of R439 200 (R34 200 on the first R100 000 plus 45 percent of income exceeding R100 000. The average rate is now 43,9 percent. Close, but still not 45 percent.
One often hears people saying that they are worse off after they have received an increase because they are paying a higher marginal rate of tax.
This is not correct. You can never earn less as you progress upwards through the marginal rates.
The marginal tax rates start at 17 percent. In other words for every rand you earn between nothing and R15 000 you will pay 17 cents.
No matter what you earn you will always only pay 17 cents in the rand for the first R15 000 you earn. For the next R5 000 you earn you will pay 19 cents in the rand and so this progresses until you reach the top marginal rate of R100 000 where you pay 45 cents in the rand.
This is called a progressive tax system. Where the government does score is on what is called fiscal drag or bracket creep. This simply means that as your income increases in line with inflation you become liable for more tax as you move into higher tax brackets.
In the budget this year the government did do a little to adjust for this position by pushing up the marginal tax brackets. Previously you paid the top marginal rate of 45 percent at R80 000. The top rate for this year clicks in at R100 000.
But whether you look at the marginal or the average rate of tax, there is no denying that the burden on individual taxpayers keeps on getting higher and higher every year.
What is particularly worrying is that South African taxpayers reach the highest marginal rate of tax at R100 000, which, without taking into account bonuses, is attained at a salary of only R8 333 a month.
By no stretch of credulity can such an income be considered high or can anyone earning this income be classified as being rich.
In fact, this is a very average income, considering the astronomical cost of living.
The point has been made that the tax squeeze on the "rich" could lead to an acceleration of the brain drain as young people take their skills and head for countries with lower tax rates, both marginal and average.
This could very well happen should there be no tax relief in the next couple of years.
Already, the tax revenue from individuals now exceeds 10 percent of the gross domestic product, and any further increases in this percentage might well see a flight of intellectual capital out of the country. This is something the country can ill afford.
Most people, I'm sure, will be willing to accept temporary high tax rates, but if the rates do not start coming down in the near future, there might well be a stampede out of Johannesburg International Airport not because the country does not have a future, but purely because of the high tax rates paid by an ever smaller number of individuals.