Oxfam has released its latest Commitment to Reducing Inequality Index, ranking governments based on what they are doing to tackle the gap between rich and poor.
The index uses a new database of indicators covering 152 countries, which measures government action on social spending, tax and labour rights – three areas found to be critical to reducing inequality.
South Africa which ranks 21 on the list globally, scored quite poorly in two of the three areas – “spending on health, education and social protection” (29) and “labour market policies to address inequality” (54).
However it was ranked best in the world (1) in the final category, “progressive structure and incidence of tax”.
Why we rank so highly
Governments have a variety of taxes they can use to raise the revenue needed to pay for public services and keep the government running.
Depending on the type of tax and its design, the burden of tax will be felt by people from different income and wealth groups. As a result, the design and implementation of taxes have an important and direct effect on inequality.
According to Oxfam’s methodology, the tax pillar seeks to measure the extent to which governments are committed to ensuring that the burden falls more on those who can afford it most.
It is comprised of three indicators: progressivity of the tax structure, incidence of tax on the Gini coefficient, and current tax collection. Each indicator contributes 33% of the score for this pillar.
This indicator measures the progressivity of the tax structure on paper, based on the rates and levels of different taxes in the country.
Specifically, it assesses the progressivity of Personal Income Tax (PIT), Corporate Income Tax (CIT) and Value Added Tax (VAT). The indicator identifies countries with higher and more progressive direct tax rates and lower indirect tax rates (or exemptions for basic foods and high registration thresholds) as being those which are making more effort to set tax rules which are progressive.
Unsurprisingly South Africa ranks highly because of a push to reduce relatively high basic VAT rates, as well as setting higher minimum tax thresholds to exclude the poorest, and lower top tax rate thresholds for personal income tax to make sure the top 10% are adequately taxed.
This indicator measures the impact of government commitments to tax based on the revenue collected from different types of taxation.
Specifically, it identifies the impact that tax revenue from PIT, CIT, VAT, social security contributions, and customs and excise duties has collectively on reducing/increasing the Gini coefficient produced by the ‘market’ (i.e. before government spending and tax are taken into account).
For South Africa (and 93 other countries) this is done by multiplying by the total revenue collected from each form of taxation as a % GDP, by a standard global coefficient for each tax that predicts the impact that tax has in the Gini.
The results for all taxes are then summed, to measure the total predicted impact of tax on the Gini.
This indicator measures whether countries are collecting as much tax as they should, to recognize that, despite having progressive tax structures on paper, countries may fail to collect these taxes in practice.
South Africa’s high ranking means that these structures do not only exist on paper but are actively being collected and being used as the main financing source for the anti-inequality spending in pillar 1.
|Country||Spending on health, education and social protection||Progressive structure and incidence of tax||Labour market policies to address inequality||Total CRI Rank|
So what’s really happening?
According to the report, countries such as South Africa – with rising inequality despite a relatively good score on the CRI Index – can only be explained by looking at a number of structural issues.
This is because the index mainly focuses on redistributive actions governments can take, rather than those that would prevent rising inequality in the first place.
While the index looks at how a government can intervene to make the labour market fairer, it does not, for example, look at corporate governance (to reduce excessive shareholder control of the economy), land redistribution or industrial policy as ways to ensure greater equality.
According to a recent supplementary Oxfam report, a number of the BRIC countries, alongside Turkey and South Africa have enough resources of their own to eliminate extreme poverty.
However, because of the aforementioned structural issues, the government has become increasingly adept at redistribution rather than tackling the issues of inequality directly.
The result is a country where the top 10% are earning seven times more than the bottom 40% – and the method of rectifying this imbalance is taxing the wealthy instead of addressing those who live in the bottom 40%.