World Bank tax study holds important lessons for SA
12 November 2014
Posted by: Author: Hilary Joffe
Author: Hilary Joffe (BDlive)
You've heard of the Gini coefficient. But have you heard of the Kakwani index? The index measures how progressive a country’s tax system is relative to its income distribution. It’s an innovation the World Bank used in its study, released last week, of SA’s fiscal policy and redistribution. It tells us something interesting, if somewhat depressing. SA has a personal income tax system that taxes high income earners quite heavily and is, looked at on its own, quite steeply progressive. But the distribution of income in SA is so profoundly unequal that we don’t come out that well compared with our middle-income peers.
Add in the social spending side of the fiscal equation, which the World Bank study finds is very well targeted to the poor, and SA comes out spectacularly well against its peers, with a national budget that does better than those of 11 other comparable countries when it comes to redistribution.
Together tax and spending reduce the Gini coefficient 22% and cut poverty significantly. Unfortunately, finds the World Bank, inequality is so high in SA to start with that even all that fiscal redistribution still leaves us as one of the world’s most unequal. That’s the broad thrust of the World Bank study, which makes the point, essentially, that we shouldn’t be looking to the fiscus to do even more about inequality and poverty — what we need is growth and jobs, as well as better quality social services.
How our taxation system might contribute to growth and jobs is not something the World Bank study looked at — it focused on the equity of the system, rather than on questions such as whether it promoted savings and investment, and whether it encouraged compliance rather than avoidance. Those questions need to be asked and the Davis committee on tax should be asking them.
But the study does paint a picture of SA’s direct and indirect taxes that is unusually "progressive", not just in the tax sense but in the political sense of being pro-poor. So, for example, the richest 10% of SA’s households pay 18.5% of their market income in personal income tax against 5% in Brazil (where the top marginal rate is 27.5% vs 40% here). And while in SA the poorest 10% pay no income tax, those households do pay some direct taxes in Brazil.
SA’s high Gini results in a Kakwani index of progressivity of 0.13 for SA against 0.27 for Brazil or 0.30 for Mexico, which shows that SA’s direct tax system, though progressive, is less so than those in other countries. "Although direct taxes in SA are working to redistribute, they therefore face strong headwinds from the underlying inequality in earnings," the study says.
The picture is even more intriguing when it comes to indirect taxes — value-added tax, excise duties on tobacco and alcohol and the fuel levy. Traditionally, indirect taxes are seen as the regressive ones — where the burden on the poor is relatively more than on the rich. These are generally consumption taxes and the poor tend to consume relatively more of their income than the rich.
SA is unusual because it relies to a greater extent than most other middle-income countries on direct taxes. But it is even more unusual in that the indirect tax system is only slightly regressive on the Kakwani index — the burden is quite even across the income distribution. But VAT on its own is slightly progressive — the richest pay 12% of their income and the poorest pay only 9.5%.
Putting direct and indirect income and consumption taxes together gives a Kakwani result that is progressive overall — and would be more so if not for the Gini. The Gini, in turn, would be a lot lower if there weren’t so many unemployed with no income. While the World Bank study is based on household survey data, the latest Tax Statistics bulletin compiled by the South African Revenue Service and the National Treasury details some of those income distribution patterns and the tax that goes with them. There, too, are some innovative new data that bear on the inequality issue, highlighting in particular how well the "insiders" with relatively well-paid jobs have done as opposed to the "outsiders" with none.
Over the past decade, the 1.6-million people who have been on the personal income tax register over the whole period have increased their taxable incomes 13% a year on average. That’s more than double the inflation rate. As the bulletin notes, there has been significant social mobility. And though inequality has risen over that period, the tax statistics are also telling a story of income distribution and taxation that is at the same time more encouraging and more complicated than it might seem.
This article first appeared on bdlive.co.za.