South Africa has one of highest personal income tax rates in the world, but the country’s already small tax base is shrinking as high-income earners leave the country. Further increases in personal income tax will put additional pressure on households already financially affected by the pandemic and undermine the chances of a stronger economic recovery.
According to the National Treasury’s 2021 Budget Review, there was no compelling case for increasing these rates then. The tax-to-GDP ratio then stood at 24.6% and a strong and sustained economic rebound was required to return to the pre-Covid-19 level of 26.3% of gross domestic product (GDP).
We can only hope that the finance minister feels the same today when he delivers the 2022 Budget Speech. Over the past six years, personal income tax rates were adjusted upwards five times to raise more revenue, with recent increases including the introduction of a new top rate of 45% in 2017 and below‐inflation adjustments in the brackets and rebates for a number of years.
Treasury said in its review that government will instead aim to reduce the rate over time by increasing the tax base through greater economic growth, employment and enforcement.
SA personal tax compared to other countries
When comparing the tax South African taxpayers pay, to that of other countries, a comparison of tax to GDP ratio is done. This is the total tax revenue as a percentage of GDP, which indicates the share of a country’s output that is collected by the government through taxes and can be regarded as one measure of the degree to which the government controls the economy’s resources.
According to the Organisation for Economic Co-operation and Development (OECD) publication, Revenue Statistics in Africa 2021, the unweighted average tax-to-GDP ratio for the 30 African countries surveyed in 2019 was 16.6%, much lower than the 26.3% for South Africa.
The Africa average was below the averages of 24 Asian and Pacific economies (21.0%), Latin America and the Caribbean (22.9%) and the OECD (33.8%). These tax-to-GDP ratios ranged from 6.0% in Nigeria to 34.3% in the Seychelles and Tunisia.
All nine resource-rich countries had tax-to-GDP levels below 15% in 2019, while most non-resource-rich countries had ratios above this level.
Globally, the figures for 2010 show that the ratio was 9.4 for Angola, 10.5 for Australia, 13,7 for Brazil, 13.3 for Canada, 9.1 for China, 34.3 for Denmark, 11.4 for Germany, 30.5 for Namibia, 24.9 for the UK and 10.0 for the US.
According to World Bank data for 2020, these ratios also varied considerably across countries and since 2019.
In South Africa, there were only 5.2 million individual tax payers in 2020, representing 9% of the population, contributing 40% of the county’s total tax revenue.
According to prof. Jannie Rossouw, visiting professor at the Wits Business School, the high-income group of tax payers who earn more than R750,000 per year has declined from 544,000 per year in the 2019/20 tax year to 535,000 in the 2021/22 tax year.
This figure corresponds with the emigration rate, indicating that high income earners are leaving the country.