In 2022/23, South Africa is forecast to obtain 36.8% of its tax revenues from personal income tax, 27.5% from VAT, and 16.9% from corporate income tax.
Since the financial crisis of 2008, the individual contributions of each of the three main taxes to the tax mix has changed substantially, says professional services firm PwC.
In a presentation to parliament this week, the group said the contribution of personal income tax has increased substantially, the contribution of corporate income tax has decreased, while the contribution of VAT has remained relatively constant.
“The significant drop off in corporate taxes following the financial crisis is evidence of the fact that corporate income tax revenues came under severe pressure as a result of the poorly performing economy since 2009.”
This clearly supports the widely accepted principle that corporate income tax revenues are particularly susceptible to weak economic growth, PwC said.
“This is of particular concern in the wake of the pandemic and the low growth rates that have been forecast over the medium term. While there was a significant increase in corporate income tax revenues in 2021/22, this was primarily driven by favourable terms of trade in the form of higher commodity prices, which are widely expected to be temporary in nature.
PwC said the upward trend in personal income tax is a clear result of substantial tax increases in each of the five fiscal years until 2018/19.
These increases were aimed at raising additional revenue and included below-inflation increases in the tax brackets and rebates, as well as the introduction of a new top rate of 45% in 2017.
“As mentioned in Budget 2022, these increases did not, however, translate into the expected increased revenue collections, largely as a result of their adverse effect on consumption and spending, and therefore economic growth.
“Moreover, these tax increases have had an adverse effect on levels of tax compliance. Accordingly, no increases in personal income tax were implemented in 2021/22 – when slight real personal income tax relief was given.”
Personal income tax
Personal income taxes are collected from an increasingly small pool of taxpayers and it is estimated that just 25% of those who pay income tax pay 80% of all personal income tax that is collected, PwC said.
“Over the past few years, a smaller proportion of taxpayers has become responsible for an increasingly large portion of total personal income tax payable.”
“High-income taxes result in lower levels of consumption and savings. These, in turn, translate into lower economic growth.”
According to studies conducted by the OECD and others, personal income taxes are, after corporate income taxes, the next most damaging tax for economic growth.
In contrast, consumption taxes (such as VAT), because they do not distort savings and investment, have been shown to be less damaging for economic growth.
Similarly, recurring taxes on immovable property – for example, municipal property rates – have been shown to be the taxes that are most conducive to economic growth as they have a limited effect on the demand and supply of land, PwC said.
“This means, essentially, that direct taxes reduce economic activity to a greater extent than indirect taxes, and therefore have more of a negative effect on economic growth than indirect taxes. Conversely, a decrease in direct taxes will have more of a positive effect on economic growth than a decrease in indirect taxes.”
It is also widely accepted that direct taxes serve as a disincentive to save and invest, the firm said.
“Consequently, relief from direct tax (such as a reduction in personal income taxes) could result in an improvement in South Africa’s poor levels of household savings.
“High tax rates also act as an incentive for taxpayers to avoid or evade the taxes. It is apparent, from SARS’s tax statistics, that there has been a marked decrease in the levels of compliance in recent years. PIT rate deductions should therefore assist in reducing the incentive to avoid and/or evade taxes by improving taxpayer morale.”