Just how Government goes about reducing this deficit is perhaps the greatest economic challenge in SA’s democratic history. In the previous budget, increased taxes (be it income taxes, capital gains tax, or the much-publicised wealth tax) were put forward as a mechanism to deal with this deficit. However, Tito Mboweni actually admitted during last year’s speech that increased tax rates were unlikely to achieve higher tax yields. Whether government maintain this position post-COVID will be very interesting to see. With this in mind, the possibility of increased tax rates has caused general nervousness and apprehension amongst the few taxpayers in South Africa. This is in fact the main issue SA’s revenue collection is facing: the scarcity of tax-paying South Africans.
It is currently estimated that 5% of South Africans pay 97% of all personal income tax in South Africa – this is an incredibly low number, even when compared to our emerging market peers. Of course, one needs to remember that South Africa is a special case and perhaps comparisons with other nations is therefore unfair. The legacy of apartheid has contributed to both poverty and inequality and this is deeply rooted in South African society today. However, what is clear and obvious is the progress that has been made since 1994 has been slow. Having such a small tax paying base is simply not sustainable in terms of trying to strengthen our fiscal position. Instead of implementing policies aimed at inclusive economic growth and trying to create jobs - thereby increasing the number of tax paying individuals - government has incrementally increased personal income tax from 40% to 45% over the last five years and a further increase is now simply not sustainable. Whilst this increase may not seem dramatic, there is a bigger issue at play here – namely that a severe lack of growth over a sustained period has allowed the focus of tax collection to shift from corporates to individuals, and a highly concentrated personal income tax base at that.
In order to elaborate further on the weaknesses of our tax system, it is important to do a comparison with our emerging market peers. Three emerging market countries that often garner comparisons with South Africa are Brazil, Turkey, and Argentina. However, looking at income tax specifically, things could not really be more dissimilar. Argentina and Turkey for example both have a maximum income tax rate of 35%. This is considered fairly high for emerging market countries. Brazil’s maximum income tax is only 27.5%. In fact, the only developing economy whose tax rate is as high as South Africa (45%) is Greece and they’ve had their own share of economic turmoil over the last decade.
With such high tax rates also comes an increased sense of anger and frustration amongst the public when rumours of rampant looting of state funds seem to make the headlines on an almost weekly basis in South Africa. This is yet another problem in South Africa. On a global scale, South Africa’s tax rate is actually much more similar to the developed nations of the world. Ireland has a maximum income tax rate of only 40% whilst the UK’s maximum tax rate is the same as South Africa’s at 45%.
Two issues therefore become abundantly clear when performing a quick analysis of the tax structure in SA:
1. Personal income tax rate is very high for a developing nation and
2. The visibility of state funds and what citizens get in return for paying their taxes leaves a lot to be desired.
Whilst tax rates in South Africa are equally high (or higher) than the UK and Ireland, we do not get anywhere near as much service from the state as the two previously mentioned nations do. Whilst this is understandable (UK and Ireland have a much bigger tax-paying base than SA) it still does not make the pill any easier to swallow for tax-paying South Africans who get no bang for their buck. This in itself also raises the risk of decreases in tax morality and increased levels of non-compliance.
One area in which the government have improved is state funding for unemployed, impoverished people in South Africa and perhaps this is one area of taxpayer’s money that is actually being used for the betterment of society. However, when one delves deeper here another issue becomes prevalent. The R350 COVID-19 relief grant administered by the government has been well-received and rightly so. South Africa’s hungry, disillusioned population was in desperate need of some sort of relief package. However, whilst this has been completely necessary and a good step in helping to alleviate widespread hunger in South Africa, our fiscal balance sheet also tells us that this is simply not sustainable for much longer. Whilst the government can be commended for taking this approach and providing some respite to our nation’s poorest people, the crux of the issue is the amount of people who are now solely dependent on state funding. This number has increased massively in the last 20 years and the preference for providing small relief packages (as opposed to implementing structural reforms aimed at inclusive growth in employment) is to be blamed for this. This is akin to ‘papering over cracks’ as the fundamental problem in South Africa remains inclusive growth. Government should be doing all they can to promote growth and employment rather than focusing on relief for those reliant on the state. Furthermore, the immense anger and unrest amongst the poor when these relief packages come to an end could lead to deep social issues within the country.
Looking at personal tax income again, a new issue has entered the fray that puts our already concentrated tax base in even more peril: emigration of skilled people from South Africa. Referred to as the ‘brain drain’, this trend is a serious cause for concern in the South African economy. Currently, the number of skilled people leaving South Africa is more than eight times the number who have immigrated to South Africa in the same period. This has many consequences for the economy. Firstly, from a pure productivity perspective, it is becoming exceptionally difficult to replace these skilled workers at the rate at which they are leaving the country. This has a knock-on effect on the economy as more money is spent on training, upskilling and recruiting and therefore valuable production time is lost. In terms of tax revenue collected by government, many of the skilled workers leaving South African shores pay high taxes. As previously mentioned, the SA tax-paying population is already very over-concentrated and the departure of more of the tax-paying population is putting immense pressure on government revenue as a whole. Essentially, the tax-paying population is getting smaller and smaller while the number of people solely reliant on state funding is getting bigger and bigger. Change is needed to correct this. It is clear that that change needs to come from policies aimed at economic growth rather than another upward adjustment in income tax.