Shifting from deductions to credits - Unpacking the distributional effects of medical expenditure considerations in South Africa

Abstract:

The recent National Health Insurance White Paper proposes redirection of medical tax credits revenue towards the financing of the national health insurance. This raises critical questions about the impact on affordability for the poor as well as fundamental legal implications. The 2012 tax reforms which saw the move from deductions to credits were justified on the basis of equitable income redistribution. This paper examines the redistributive effects of the medical tax credit system. With the shift from deductions to credits, we interrogate whether the data indeed yields the desired effects of a more equitable distribution. We find that the core medical tax credit has the desirable qualities of a progressive tax system. However, the additional medical tax expenses appear to be distortionary, introducing great inequality across income groups as it turns out that the high-income earners tend to benefit more from these additional medical tax expenditures.