South Africa heading for disaster

South Africans are overtaxed and far beyond the Laffer Curve, meaning any more tax hikes to raise revenue will likely have the opposite effect.

This is according to a new analysis by Aluma Capital chief economist Frederick Mitchell. He said further taxes will hurt the South African economy, and the government should focus on cutting its spending.

The Laffer Curve is a commonly used economic theory that describes the relationship between taxes and tax revenue.

Economist Arthur Laffer initially proposed the model, suggesting an “optimal tax rate” maximizes government revenue without discouraging productivity, investment, and economic growth.

Simply put, the curve represents the idea that hiking taxes beyond a certain point can lead to diminishing returns.

Higher taxes may disincentivise work, entrepreneurship, and investment or lead to immorality and non-compliance, effectively reducing the overall tax base and revenues.

Mitchell took the latest data from the National Treasury for the 2023/24 financial year and plotted the curve for personal income tax (PIT), corporate income tax (CIT) and value-added tax (VAT).

All three graphs show that South Africa is well beyond the optimal tax rate, which means that trying to tax these categories further will harm the economy.

“To balance the budget—knowing these Laffer curve points—means that the Government of National Unity(GNU) should rather implement expenditure reductions in the forms of austerity measures rather than increases in taxes to ‘balance the books’,” Mitchell said.

Personal Income Tax Laffer Curve

Corporate Income Tax Laffer Curve

Value Added Tax Laffer Curve

South Africa is heading for disaster

The analysis of the Laffer Curves for South Africa shows a bleak reality in the context of the new 2025 budget, which is set to use higher taxes to cover the government’s spending.

The original budget proposed hiking VAT to 17% to raise an additional R60 billion to close the spending gap. However, this has been stopped.

Economists now anticipate higher fuel levies, higher sin taxes and no adjustments to tax brackets—a form of passive inflation tax—to cover at least some of the shortfall.

On the expenditure side, however, there are no easy answers.

The state wants to increase spending to hire more skilled workers in health, education, and policing, cover higher-than-inflation grant increases, and keep the Social Relief of Distress (SRD) grant going for another year.

Unfortunately, the budget expectations for spending are underestimated at best, and wildly out of step with reality at worst.

According to Mitchell, President Cyril Ramaphosa’s State of the Nation Address (SONA) in February mentioned many more spending pressures that don’t appear to have been adequately budgeted for.

These include R940 billion for infrastructure maintenance and development over the next three years and a R20 billion transformation fund.

Meanwhile, the state is aggressively pursuing the National Health Insurance (NHI) scheme, and moving forward with the basic income grant, and has to face a new 17% funding gap caused by the political fallout with the United States, which cut assistance to South Africa.

Even looking beyond the Laffer Curve, Mitchell said that South Africa’s already burdened tax base cannot afford to fund these initiatives and shocks.

These are just the most prominent issues, he said, not even counting the potential disaster ahead if South Africa is booted from the African Growth and Opportunity Act (AGOA).

“Finance Minister Godongwana will have a real hard time balancing the books concerning South Africa’s finances in the medium-term—and some serious hurdles are expected along the way,” he said.

“According to these basic assumptions, we can only assume that state borrowing will continue to rise.”