Are South Africans Overtaxed?
01 March 2012
Posted by: Author: Kyle Mandy
Are South Africans Overtaxed?
As a starting point it must be borne in mind that individuals do not only pay income tax.They also pay many other taxes including VAT, transfer duties and other indirect tax included in the selling price of goods such as excise duties, import duties, fuel levies and environmental levies.This makes it exceedingly difficult to determine the real tax burden borne by individuals.However, for purposes of this exercise we shall focus on personal income tax (PIT) which currently comprises some 34% of total tax revenues.
To begin with, it is worth taking a macro view of the PIT burden and who pays what portions.According to the 2012 Budget Review, there are estimated to be some 6.2 million individual taxpayers in South Africa who will pay PIT in 2012/13. Of those taxpayers, only 4.5% are expected to earn more than R600 000 a year, but this pool is expected to pay 38% of the total PIT of R286 million or R392 000 each on average.
According to the most recent populations estimates published by Statistics South Africa, our population is a little over 50 million of which 20 million are under the age of 20.To put the PIT borne by these middle and high-income earners into perspective, bear mind that government plans to spend just over R969 million in 2012/13 and that this amounts to a mere R32 000 per adult.The implication is that South Africa’s middle and high-income earners receive less than 10% of their PIT contributions back in the form of services.Of course, it must be remembered that these same taxpayers would likely bear a similar portion of the burden on other taxes which would reduce this percentage significantly when compared to their total tax burden.Another consideration is that middle and high-income earners do not benefit from a large portion of this expenditure.For example, these taxpayers would not benefit from the likes of social protection and housing and may also not benefit from expenditure on health and basic education, which make up a substantial portion of expenditure.The result is that South Africa’s tax system is massively redistributive.
How then does South Africa’s PIT rates compare to those of other countries? This is a notoriously difficult comparison to make due to the fundamental differences between tax systems.However, it is possible to make some high-level comparisons.For ease of comparison the South African tax rates applying in 2011/12 are used. A South African taxpayer under the age of 65 with taxable income of R500 000 would have to pay PIT of R127 095 at an effective tax rate of 25.4% and a marginal rate of 38%.A person earning an equivalent amount in Australia would pay PIT at an effective rate of approximately 19% and a marginal rate of 30%. In the United Kingdom, PIT would be levied at an effective rate of approximately 16% and a marginal rate of 20%.These tax rates exclude the Medicare levy in Australia and the national insurance in the United Kingdom in order to make them more comparable with South Africa, particularly insofar as middle and high-income earners are concerned.
The conclusion is that South Africa’s PIT rates are high in comparison to these two developed countries.South Africa is not out of line with these countries when it comes to maximum marginal tax rate.Australia has a maximum marginal rate of 45% and the United Kingdom a maximum marginal rate of 40%, excluding the 50% super tax rate that applies only at GBP150 000.The reason for the difference lies in how quickly South Africa’s marginal rates increase.
However, a comparison to other developing countries of the likes of Brazil, India, Mexico and Turkey is perhaps more appropriate.In Brazil, our taxpayer would be paying an effective tax rate of approximately 20% at a marginal rate of 27.5%. In India, the effective tax rate would be 26% at a marginal rate of 30%; in Mexico, approximately 25% at a marginal rate of 30%; and Turkey approximately 27% at a marginal rate of 35%.At face value South Africa’s effective rate doesn’t look out of line with these countries.
However, it is noteworthy that in all these instances the taxpayer would be paying tax at the maximum marginal rate applicable in those countries.The result is that as the income increases, South Africa’s effective tax rate would increase far quicker and quickly outstrip those of these developing countries. South Africa’s maximum marginal rates are also far than the likes of Nigeria (25%), Kenya (30%), Mauritius (15%), Botswana (25%), Egypt (25%), Ghana (25%) and Malawi (30%), all countries with which South Africa competes as an African investment destination or as the gateway to investment in Africa.
South Africa’s maximum marginal tax rates are out of line with those of comparable developing countries.South Africa cannot continue on this path of trying to squeeze every last drop out of its small pool of overburdened middle and high-income taxpayers.It is imperative that the tax base be broadened and PIT rates decreased in order to improve South Africa’s competitiveness.
Source: By Kyle Mandy (TaxTalk)