SA’s tax revolt is already underway, says economist

You can also listen to this podcast on iono.fm here.

DUDUZILE RAMELA: Benjamin Franklin is said to have coined the phrase nothing is certain but death and taxes. On the latter, there’s an argument being made that South Africa is facing a tax revolt.

In the 2023 tax year, around 7.6 million individuals filed tax returns, with only 1.6 million earning more than R500 000 annually. That contributed some 76% to all personal income tax.

With an economy growing on average 1% each year, high unemployment and skilled emigration, South Africa’s remaining tax base is under pressure.

Chief economist at Efficient Group Dawie Roodt joins us for more. Dawie, thank you very much for your time this afternoon. Maybe let’s start with an introduction, if not a reminder of South Africa’s fiscal landscape, how would you describe it?

DAWIE ROODT: Hello, it’s very nice talking to you. Well, if you look at the budget, when you talk about fiscal policy, you usually refer to the budget.

The budget consists of all sorts of things, like, for example, the revenue side, the various taxes, and where the main tax revenue comes from, like, for example, personal income tax is the most important revenue source to the minister of finance (Enoch Godongwana), and you mentioned some numbers there.

There is, of course, value-added tax (Vat) is a very important tax, as well as company taxes and a number of other taxes like the fuel levy and sin taxes and so on. So that’s the revenue side of the budget.

And, of course, there are some people who pay much more than other people on the revenue side, and we can talk about that just now.

Read/listen:

SA’s tax crisis: Is the system on the brink of collapse?
A theory of a tax revolt: Is South Africa on the brink?

On the expenditure side, the money goes somewhere and it typically goes to things like, for example, education, the biggest expenditure item, but also to interest and the various grants and that stuff.

So the money goes somewhere.

ADVERTISEMENT

CONTINUE READING BELOW

Then the third aspect of a budget that is certainly important is that the money that the politicians borrow on our behalf, it’s called the fiscal deficit – and the minister of finance has been borrowing a lot of money on our behalf – and in the process, what has happened, the state debt levels have reached dangerously high levels.

So that’s roughly where we are. I can tell you that the tax burden is very heavy on a very, very narrow tax base in South Africa.

Put differently, a few pay a lot of taxes, while the money goes to a large number of people, and there are something like 30 million people out of a population of 65 million people who receive an income from the state every month.

Then the third thing is the debt levels have reached really very high levels, something that we all need to be very, very concerned about.

Read: Sars tightens its grip on tax penalties

What has been happening recently is that the minister of finance needs to spend a lot of money because there are so many people who are depending on the state for an income, and the minister of finance has been giving more and more money to Sars (South African Revenue Service), and Sars is squeezing every last drop of blood out of the economy because the economy is not growing fast enough to fund the state as well.

So that roughly is where we are at the moment on fiscal policy.

DUDUZILE RAMELA: You said there are those who pay more than others and we can go into that. When we look at the country’s tax burden, what is our tax-to-GDP (gross domestic product) ratio and what does it tell us about the tax burden in trying to understand it.

DAWIE ROODT: Tax-to-GDP ratio, that’s actually quite a difficult question. Let me tell you why. Because the expenditures – and maybe let me just interrupt myself for a moment – when we talk about taxes and when we talk about state expenditure, I’m referring here specifically to the national accounts.

That’s what the minister of finance is responsible for.

There are many other authorities as well, the local authorities or the state-owned enterprises or the provinces, or even things like, for example, the Road Accident Fund (RAF). They are all part of the state, if you like.

ADVERTISEMENT:

CONTINUE READING BELOW

Read:

DoT considering private and public contributions to fund the RAF
Taxpayers’ wallets not enough to cover public servants’ paycheques

But let’s just concentrate on the national accounts. Now, state expenditure as a percentage of GDP is approximately 32%, while state revenue or tax burden is just below 30%, at 28%, 29%.

The difference between the two is the so-called fiscal deficit, and that’s what the minister of finance borrows.

But remember the deficit, the money that he borrows, we have to repay that. So the deficit is nothing but postponed taxes, and the day will come that we actually need to pay off that debt.

So the right way of trying to answer your question, what is the revenue as the percentage of GDP, that is actually equal to the expenditure-to-GDP because expenditure consists of, well, revenue plus the deficit, which are both actually part of the tax burden.

The answer to that is more than approximately a third of the total economy is spent on state expenditure or then on taxes.

DUDUZILE RAMELA: Speaking at the KragDag conference, you made the assertion that a tax revolt is already underway in the country. What is it that you’re seeing with your client base that suggests this?

DAWIE ROODT: Just for interest, the first tax revolt that I’m aware of in South Africa happened in the 1800s, in the then Natal, when especially the Zulus revolted against a poll tax. A poll tax is where you pay a fixed amount of money, everybody pays exactly the same amount of money.

But what we’ve seen in South Africa, the tax burden has been going up, creeping up.

The total state expenditure today is approximately double where it was in 1970. So the state has been getting bigger and bigger and bigger. That’s the nature of all of us, we all want the state to spend money on me, but I don’t want to pay the taxes.

That is, I guess, the biggest flaw of a democracy. If we all vote for politicians who will spend on money on me, but we don’t want to vote for politicians who are going to take taxes away from me.

But what I have seen, and I think this is not only an emotional reaction, but there’s a lot of actual economics behind this as well, people are really getting quite aggressive when it comes to tax planning. We know what happened to the toll roads. That’s a very good example where people simply stop paying the tolls.

That is in a way a tax revolt.

I know that when people come into my office, what they tell me about taxes and what they think about taxes. One should have sympathy for this because the tax burden, as it is, is very unfair, and we can talk about that if you want to.

ADVERTISEMENT:

CONTINUE READING BELOW

But not only is it very unfair, people are very unhappy with the way money is being spent.

We know about all this corruption and about all these commissions and so on, and how the money is spent, and people don’t like that.

People quite often tell me, but listen, I’m happy to pay taxes, but the money must be well spent. I can also tell you objectively, South Africa’s tax burden is higher than similar countries in the world. But compared to, say, the advanced countries like the rich world, South Africa’s tax burden is actually on the low side.

But there are some other factors as well, inequality is much, much higher in South Africa than, for example, in European countries. The redistribution effect of the fiscus in European countries is much, much lower than in South Africa.

Read:

SA cannot redistribute its way to prosperity
Reparations must help to address Africa’s colonial legacy

Let me just tell you what I mean by redistribution effect, and that is that I mentioned that the people paying their taxes are not the people who are receiving the benefits of those taxes mostly.

That means that the state takes money from the rich and gives to the poor, in simple terms. The redistribution effect of the state in South Africa, and I’ve done the calculations, is probably the highest in the world.

Not necessarily is that wrong, there are many reasons for that, but I’m just saying that the people paying their taxes are not the people getting the benefits, and the benefits are not always that well spent either.

So yes, without a doubt, people are very unhappy about the tax burden.

DUDUZILE RAMELA: I think for some time now, the President (Cyril Ramaphosa) of South Africa has been talking about, even before the GNU (government of national unity), a social contract, because to your point, people don’t mind paying taxes as long as they see where their monies are going.

Unfortunately, that’s all the time we can afford this afternoon.

We do know that you’re driving, Dawie. Safe travels and thank you very much for joining us here on Moneyweb@Midday. Dawie Roodt is chief economist at Efficient Group.

#SAs #tax #revolt #underway #economist