Red flags for South Africa’s overburdened tax base
Data from the National Treasury’s medium-term budget shows that 2.5 million South Africans are estimated to cover 84% of all personal income tax over the 2022/23 financial year.
This is up from some 2 million taxpayers covering 80% of the tax burden in the last year.
While economists and financial service firms often warn of a shrinking tax base due to emigration, Treasury’s data points to the country’s tax base actually growing over the current financial year.
However, the burden on taxpayers is clearly becoming increasingly top-heavy, with the biggest chunk of income tax being taken from top earners.
For 2022/23, Treasury estimates that 133,000 individuals, or 1.8% of registered taxpayers, who earn in the top income bracket of above R1.5 million annually – will end up paying 28% of all personal income taxes in the country this year.
This is up from a slightly lower burden of 27% placed on 113,000 individuals in 2021/22.
But it’s not only the richest of the rich taking on more – the data shows that anyone earning over R500,000 a year in South Africa will be carrying a greater tax burden in 2022/23. The only exception is the R750,000 to R1 million band – however, this is because it is not growing in proportion to other bands.
Estimates of individuals and taxable income (National Treasury)
This growing tax burden on wealthier individuals could lead to greater taxes being placed on the already small tax base or well-off taxpayers choosing to jump ship quicker than usual, economists warn.
Speaking to Daily Investor, chief economist at Efficient Group Dawie Roodt said that the tax burden is getting heavier on a smaller number of individuals.
The economy is not growing, and many taxpayers are leaving the country, which places tremendous pressure on South Africa’s finances, said Roodt.
“The state cannot afford this anymore. The tax base is simply not strong enough to carry it,” Roodt said.
The CEO of the South African Institute for Tax Professionals (SAITP), Keith Engel said that the South African Revenue Service (SARS) is taking a tougher, more dedicated stance on the few that pay the most.
Engel said that as the country’s population increased over the year, the tax base has not grown in proportion.
SARS is in a unique position whereby it could shoot itself in the foot by upping taxes on the small portion of the base leading to people moving more money offshore or emigrating.
“If you try to tax them too hard, to get your fair share, they are likely to leave,” said the tax expert. She said the best way to grow the tax base is to grow the economy and not look at taxation in isolation.
Financial services firm PwC noted that high income taxes result in lower levels of consumption and savings. These, in turn, translate into lower economic growth, said the group.
Talk of a possible ‘wealth tax‘ by the ruling party ANC on top earners in South Africa has also driven people to consider leaving the country to catch up with their assets that have already been put offshore.
Dani Van Vuuren, a business development consultant at Sovereign Trust said that tax rates on higher-income earners are already high.
“We believe a further wealth tax will only serve to decrease our already diminished taxpayer base.
“With more entrepreneurial citizens leaving the country, this would have a major impact on the fiscus through lower future tax income, reduced wealth creation opportunities and fewer potential employment opportunities through local businesses,” said Van Vuuren.
Already high tax burden.
South Africa has a ton of hidden taxes that pile on top of already high tax burdens.
The Organisation for Economic Cooperation and Development (OECD) compares tax rates across the world and finds that South Africa’s personal income tax level is relatively low when compared to the rest of the world, but there is a catch.
The tax burden on South African consumers as a whole is high when compared to elsewhere. Looking at the country’s tax-to-GDP ratio, according to the World Bank, it is estimated to reach 25% by the end of this financial year.
This is 10% higher than the minimum needed to meet social goals. The South African Institute of Chartered Accountants (SAICA) said it is evident that South Africa’s tax revenues have (on average) been growing despite weak economic growth.
The group noted that 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.
Alongside a few positive developments when taxes are paid, the country has hidden additional costs such as Value-Added Tax (VAT), a sugar tax and fuel levies.
Such tax burdens also constitute in South Africans packing their bags and moving to places such as New Zealand, Canada and the UK despite their slightly higher personal income tax rates.
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