1.5% of SA population pay 61% of income tax: Are we overtaxed?

With 1.5% of the South African population paying almost 61% of all the income tax collected by the South African Revenue Service (Sars) every year and the Cabinet making plans to cover the R58 billion shortfall in the budget, consumers wonder if they are overtaxed and if they will pay even more after the 2025 budget speech on 12 March.

According to the unembargoed Budget Review that would have accompanied the postponed national budget, 978 140 South Africans or 1.5% of the population, pay 60.9% of all personal income tax in the country, while only 235 542, or 0.4%, pay 33% of all personal income tax in a country with a population of 62 million.

The Budget Review shows that government needs an extra R58 billion but must now try to collect that in tax without increasing value-added tax (VAT) by 2% to satisfy the other parties in the government of national unity (GNU). Would it be a good idea to increase personal income tax to make up for the shortfall?

Zandi Makhoba, consumer economist at Liberty, says it is a possibility as it was effectively done in the 2024 budget. “The real question is if that would raise the R58 billion shortfall without hurting economic growth.

“Employment is relatively stable and has been growing, and therefore, it is pretty much a guaranteed revenue stream, unlike corporate income tax, which depends on business profitability. However, with the prolonged pinch on middle-class balance sheets, a further tax increase would also strangle household consumption and reduce the chances of improving the debt/GDP ratio, which is the aim of fiscal consolidation. The assumption is that this is less likely with VAT.”

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Are South Africans overtaxed?

Are South Africans overtaxed? Makhoba says it depends on how you look at it. As this table from Trading Economics of the top personal income tax rates in the world shows, South Africa is among the countries with the highest rates, with a maximum rate of 45%, but far from what other countries face:

Makhoba says that even if this were added to VAT, fuel levies, and other administered prices, it would be difficult to say we are over-taxed as most other countries have these too, and some are at much higher rates than us. “The biggest challenge is a small tax base compared to some countries. In countries with a much lower unemployment rate, even low tax rates generate good revenue.”

She does not believe that an increase in personal income tax could push taxpayers over the edge and make those who can afford it leave the country. “The cost of living in many other countries is so much higher than in South Africa, so much so that many are returning from more developed countries.

“The threat of higher income tax is mostly the impact it would have on the domestic economy. Improved global access also means that the wealthy can generate more income/wealth in other jurisdictions and enjoy those gains here. The greater threat is of investment flight more than a human and special skills flight.”

Will a wealth tax be a good idea? Makhoba says the short answer is that high-income inequality somewhat justifies a wealth tax and could easily make up the much-needed revenue. “However, the Medium Term Budget Policy Statement (MTBPS) referred to better policy coordination, and the wealth tax conversation is an opportunity to explore ideas in this area.”

She says for example, rather than punishing” the rich they could be encouraged to invest locally for additional tax benefits. “We must be clear on what we want to achieve. The goal is not higher revenues but expansionary fiscal policy, and there are many ways to skin that cat.”

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SA’s income tax base too narrow for another increase

However, North-West University professor of economics Waldo Krugell says government would be wary of increasing personal income tax, specifically since the base is so narrow, with a small number of taxpayers paying a large share of income tax.

He points out that although our personal income tax rates are high by international standards, our VAT rate is low. “I do not think it is only an issue of being over-taxed. It is also tax payers feeling that they are not getting their money’s worth from the spending.”

Krugell thinks a wealth tax is a terrible idea. “Firstly, how is wealth defined? Internationally, property, financial assets and personal property such as jewellery, art, or vehicles are the basis of such taxes. Of course, all debts must first be deducted to determine the net worth.

“In France property with a net value above 1.3 million Euro is taxed. In Norway, individuals with a net worth above 1.7 million Norwegian Kroner are taxed at 1%. In Spain, the rate is between 0.16% and 3.5% on net asset values above 700 000 euros.

“Few countries use it, while the brackets are high and the rates are low, while it generates very little revenue for the authorities. The damage it can do to confidence in South Africa is significant.  The Expropriation Act and a wealth tax in one year will really be like shooting yourself in the foot.”

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Income tax increase would have to include middle class to get enough revenue

Frank Blackmore, lead economist at KPMG South Africa, does not think it will be easy for government to increase income tax to plug the funding gap because the tax base is so narrow. “Increasing the top end of the income scale will not yield enough revenue without a very material increase or an increase from far lower down on the income tax bands, making it a tax on the middle classes.

“This segment is financially mobile, and they will move their assets to other jurisdictions, while international investors will go to jurisdictions with far lower income tax rates.”

Blackmore warns that a number of high-income people already left the country, with about 38 000 taxpayers ceasing their South African tax residency between 2017 and 2023 and their contribution to the fiscus was substantial.

He also does not think a wealth tax would be a good idea because it would have to be imposed on middle-income individuals, too, to raise significant amounts of tax.

ALSO READ: SA has one of highest personal income tax rates in the world

South Africans are overtaxed — near top of Laffer Curve

Maarten Ackerman, chief economist at Citadel, says government can definitely think about rather increasing personal income tax, but that would not necessarily be the solution to generate more revenue.

“South Africans are overtaxed. We are close to the tipping point on the Laffer Curve, which shows the relationship between higher taxes and actually getting revenue. A higher increase in income tax is not necessarily going to reflect in higher revenue for the fiscus.”

He believes people will just find legitimate ways to avoid paying more tax. And a wealth tax? “The problem with the wealth tax is that we have not seen any implementation yet. It is not a transactional tax. With all other taxes, some transaction takes place but not with a wealth tax, making it difficult to administer and enforce.”