The Employment Tax Incentive – a reform proposal

> In the context of South Africa’s deep structural unemployment, neither the empirical evidence nor the underlying theory supports the current narrowly targeted wage subsidy of South Africa’s youth employment incentive. We outline recommendations for reform of the incentive as a broad-based employment subsidy, drawing in part on a comparison with the US earned-income tax credit. How should the ETI’s design be adapted, and what are the cost implications?   Introduction The National Treasury introduced the Employment Tax Incentive (ETI) in 2014 to encourage employers to hire young work-seekers. A variation on the earlier recommendation of the International Panel on Growth for a “once-and-for-all” fixed wage subsidy to facilitate the school-to-work transition, the ETI also represented a considerably more modest intervention in the labour market than the general wage subsidy then under consideration as part of the comprehensive social security reform process . The social security wage subsidy proposal was to supplement the earnings of all low-wage employees, both as a redistributive measure and to assist in their participation in a statutory payroll-financed retirement and social insurance arrangement. The evidence from the current ETI arrangements suggests that a narrowly targeted youth incentive is an inadequate intervention in the context of high unemployment. On both redistributive and labour market grounds, there should be a reconsideration of the design of the ETI in favour of a broad-based wage incentive. While education and training reforms and targeted industry-support measures are also key components of an employment-focused growth strategy, South Africa needs to provide economy-wide support to labour-intensive firms. The current ETI provisions The ETI operates through employers’ PAYE returns to SARS. Employers can deduct the ETI amount from the total PAYE amount owed to SARS each month. If the ETI exceeds the employees’ tax payable, the excess can be rol