The South African Institue of Chartered Accountants (SAICA) says South Africa should revisit the possibility of lowering its tax-to-GDP ratio and introducing a tax ceiling.
In a presentation to parliament this week, the group said the tax-to-GDP ratio is used as a measure of how well the government controls a country’s economic resources and is a good gauge of a nation’s tax revenue relative to the size of its economy.
According to the World Bank, tax revenues above 15% of a country’s GDP are a key ingredient for economic growth and, ultimately, poverty reduction.
“Higher tax revenues mean a country is able to spend more on improving infrastructure, health, and education – keys to the long-term prospects for a country’s economy and people.
“Thus, the higher the ratio, the higher the proportion of money that goes to government coffers; ie, a low ratio puts pressure on a government to meet its fiscal deficit targets.”
South Africa’s ratio is estimated to be 24.7% in 2021/22 rising to 25% in 2024/25.
However, it is has become evident that South Africa’s tax revenues have (on average) been growing despite weak economic growth, SAICA said.
“A high tax-to-GDP ratio is not a problem where taxpayers are receiving good value for their money, however, this is not a reality currently in South Africa.
“The Katz Commission in its third report recommended a set ceiling of 25% as the maximum tax to GDP ratio. The purpose of this is to deal with when too high taxes become damaging to an economy as theorised by the Laffer Curve.”
National Treasury has in recent years rejected this ceiling and questioned it, which is reasonable. However, it has not proffered any research that shows that too high taxes can never be damaging to the economy, the institute said.
Civil society group Outa has previously published a paper on a tax ceiling and concluded that 18.6% is an appropriate tax to GDP ratio for the country. It added that parliament itself considered the issue in 1996 but has not since revisited its recommendations.
“Should the current fiscal policy in fact be wrong and damaging to the economy, it would be incumbent on parliament to ensure it is properly informed on this risk, SAICA said.
“Statements made by the Minister for example, that the return from increased taxes has been difficult to gauge in the last few years as in some instances higher tax rates have not realised higher returns, have been made but the reasons for this was not made clear – is it damaging the economy or something else?”
Concrete evidence South Africa is at top of Laffer curve
The 2022 national budget provides concrete evidence that South Africa is at the top of the Laffer curve, says Tertius Troost, manager of tax consulting at Mazars.
The Laffer curve is an economic theory that shows that if citizens are taxed at increasingly higher marginal rates, then at some point revenue collections will start to decline as people stop paying. The curve is used to illustrate the argument that sometimes cutting tax rates can result in increased total tax revenue.
“Increasing the top tax rate from 41% to 45% for taxable incomes above R1.5 million in 2017/18 appears to have generated significantly less than the projected R4.4 billion per year,” said Troost.
“It shows that rate increases lead to emigrations of high-net-worth individuals which have a negative effect on state coffers. It is encouraging to see that National Treasury is keeping a close eye on this.”