Financing a universal income grant in South Africa

Abstract

A universal income grant can be financed through an increase in indirect taxes. The actual or net burden is less than one third of the gross cost of the payments made, i.e. about R15 billion rather than R52 billion. The net impact remains progressive, with the affluent progressively paying more and the poor progressively benefiting more. Financing a universal grant through what is effectively an expenditure tax increase is far less likely to distort the economy than increases in income taxes or company taxes. The proposal also avoids the problem of poverty traps. Paying the grant to individuals (except for children, whose grants are paid to the care‐giver) and making the net benefit or burden of the proposed grant dependent on individual expenditure rather than on family or household income, means that largest benefits are targeted on those household members (typically women and children) who receive small proportions of family income. Recent technological developments mean that it might soon be possible to implement the system here proposed.