Government admits defeat on income taxes in South Africa

National Treasury has admitted that previous attempts to raise revenue through raising income taxes didn’t work, and that trying to do so to fill the current gap in the budget will hit the same wall.

Responding to the debate around the 2025 Budget, the finance department reflected on the various tax measures proposed by stakeholders to plug the nearly R70 billion gap in the budget.

The shortfall came as a result of dropping the proposed VAT hike in the 2025 budget, leaving the state scrambling to make up the loss in future years.

For 2026, Treasury has already made it clear that an additional R20 billion will need to be raised through further tax measures.

While some budget critics have been calling for the government to narrow the gap by cutting state spending, others have called for more direct taxes, like adding higher income tax brackets or introducing a wealth tax.

However, the department said that this is unlikely to work.

Focusing on personal income tax, the National Treasury noted that this tax segment has been the fastest-growing revenue source in the budget for the last 20 years.

PIT as a percentage of GDP rose from 6.6% in 2004/05 to 9.8% in 2024/25, reflecting the increasing burden on income taxpayers to fund government spending.

It warned that if the state pushes for more tax increases on top of the previous increases, it will likely bring in proportionally less revenue, as high tax rates incentivise taxpayers to avoid or evade paying.

“South Africa has a high share of personal income tax as a percentage of GDP and a high top tax rate, both of which are much higher than other developing economies,” Treasury said.

“Previous tax rate increases for personal income tax did not raise the expected revenue, as taxpayers changed their behaviour to avoid the tax.”

It’s own research shows that the introduction of a 45% tax bracket in 2017/18 had a negative impact on taxable income.

This was one of the reasons Finance Minister Enoch Godongwana proposed hiking Value-added Tax, as this is far more difficult to avoid, and the behavioural responses are lower.

Wealth tax is not a solution

The logic for not going the route of increasing the burden on income taxpayers also follows through to calls for a wealth tax.

Reiterating its position on this tax measure, Treasury again stressed that the real-world outcomes will not match the intentions of such a move.

While proponents have argued that a dedicated wealth tax on the top 5% of earners in the country could draw in billions of rands in revenue, Treasury said that the reality would be negative.

The department said that wealth in South Africa is already taxed, with multiple tax measures drawing in about R21 billion in revenue.

These include:

• Estate duties on all assets (financial, real estate and land)
• Donation tax on asset donations
• Security transfer tax on all equity transfers
• Real estate transfers through transfer duties
• Property taxes on real estate at local level
• Capital gains tax
• Ad Valorem Tax on luxury cars and other high-value products.

Outside of these tax measures, the top three income tiers in the country pay over 60%, or close to R490 billion of all personal income tax.

If new taxes are introduced that change taxpayer behaviour, as seen with the previous 45% tax bracket in 2017/18, this could put the entire tax base at risk.

This is because high net worth individuals are internationally mobile and more likely to simply end their tax residency if they feel overburdened by taxes.

“If only 10% of this tax base were to change their tax residency, South Africa could lose R49 billion in income tax revenue annually, plus all the other taxes they currently contribute,” Treasury said.

The department said that the best way to boost tax collections is to focus on compliance through the South African Revenue Service (SARS) and by broadening the tax base through economic growth.