By Dr Ferdie Schneider, National Head of Tax
The burden of the South African taxpayer can be measured in a number of manners. It can be measured in terms of direct or indirect or total tax contribution (by individuals or corporates). Or, it can (as we have seen more recently) be measured in terms of Tax Freedom Day. Tax Freedom Day represents the day following the period in which the average South African taxpayer has earned enough money to pay of his/her tax obligations for that calendar year. Tax Freedom Day is therefore calculated by dividing general government revenue by Gross Domestic Product (GDP) and applying that ratio to the number of days in a year, and adding a day.
Although South Africa places a strong reliance on indirect taxes (approximately 35% of Gross Tax Revenue), the primary source of tax revenue is direct taxes. The contribution of the primary direct taxes to Gross Tax Revenue is close to 60%. Personal Income Tax (PIT) is by far the largest contributor to South Africa’s Gross Tax Revenue and PIT’s contribution is estimated at about R482 billion or almost 40% of Gross Tax Revenue (of almost R1.3 trillion). The PIT contribution is more than double than that of Corporate Income Tax (CIT). CIT is budgeted to contribute close to R219 billion or 17% of Gross Tax Revenue in 2017/18. The burden on the South African taxpayer, especially personal income tax, is a very important consideration in fiscal policy as a too heavy burden on taxpayers can have various adverse consequences such as a brain drain, increase in tax avoidance mechanisms, or moving capital or income generating potential to lower tax jurisdictions.
South Africa’s skewed income distribution (and the need for increased tax revenue caused by a number of other non-tax issues) places the personal income tax burden heavily on the more affluent taxpayers. Approximately a half a million taxpayers contribute about 50% of personal income tax revenue. These half a million taxpayers (of a total population of 55 million) contribute almost one fifth of Gross Tax Revenue. Just over 100 thousand taxpayers (or 0.19% of the total population) contribute more than a quarter of personal income taxes or 10% of Gross Tax Revenue.
South Africa’s Tax Freedom Day fell on 23 May 2017 this year. As a result, taxpayers (if they first had to work until they paid their taxes) would have worked until 22 May 2017 to do so. South Africa’s Tax Freedom Day has moved out considerably over the last few decades, which means that the taxpayer now takes much longer to earn enough to pay for taxes. Statistics show that South Africa’s Tax Freedom Day in 1972 was on 27 March. Tax Freedom Day in 1994 was on 12 April. It is now taking about 44 days or six weeks longer to pay taxes to government than it did 23 years ago and 60 days more than 45 years ago. The extension of Tax Freedom Day, especially since the 1994 elections, can to some extent be justified as the South African economy now has to cater for the full population and address inequalities of the past.
It has been mooted that the South African government is comparatively larger than about 85% of countries and government expenditure, and in the worst 17% of countries in the world, at comparative economic development levels. In terms of international standards, it has been estimated that South Africa should be spending at least 20% less that the current government salary expenditure.
The concept of Tax Freedom Day and its calculation are not without criticism. One of the main criticisms against the calculation of Tax Freedom Day is the application of an average effective tax rate as a population to annual GDP. This is misleading as most South African taxpayers pay less than the average effective tax rate due to the steep progressivity of the personal income tax system. As a result, most taxpayers actually celebrate Tax Freedom Day much early than the average. A further criticism of Tax Freedom Tax is that tax burdens should not be compared in isolation of the provision of public services provided by government. If Tax Freedom Day is compared to the development of socio-economic infrastructure and the economic well-being of the taxpayer under the ruling government, such as comparison is far more reasonable, and government can at least (in theory) be held accountable. Although these are fair criticisms, the value of the Tax Freedom Day concept lies more in its comparative properties, as the contribution of taxpayer can be monitored over a number of years.
This analysis contextualises the tax burden of the average South African taxpayer using Tax Freedom Day as a departure point. The continual extension of Tax Freedom Day over the last number of decades illustrates the need for National Treasury to seek alternative sources of revenue, other than those that would increase the already substantial burden on the South Africa taxpayer. A likely candidate should be the VAT with due consideration given to the unequal income distribution in South Africa. First prize, however, will be for government to address the obvious low hanging fruit such as government expenditure, wasteful application of resources, and effective management of state enterprises which can reduce the need to find more tax revenue. Government would also come under far less criticism if it can demonstrate strong development of socio-economic infrastructure, which it has not really been able to do over the last 20 years or so.
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