Economist Asserts That South Africa’s Tax Revolt is Already Underway

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DUDUZILE RAMELA: Benjamin Franklin famously said that nothing is certain except death and taxes. In this vein, there’s increasing chatter around a tax revolt in South Africa.

During the 2023 tax year, about 7.6 million individuals filed tax returns, with only 1.6 million earning over R500,000 annually. This group contributed roughly 76% of total personal income tax.

With an economy growing at a mere 1% annually, alongside high unemployment and skilled emigration, South Africa’s tax base is becoming more constricted.

Joining us is Dawie Roodt, Chief Economist at Efficient Group. Thank you for being with us today. To begin, how would you describe South Africa’s fiscal landscape?

DAWIE ROODT: Thank you; it’s great to be here. When discussing fiscal policy, we usually refer to the budget. The budget comprises various elements, especially the revenue side, particularly personal income tax, which is the primary revenue source for the Minister of Finance (Enoch Godongwana), as you noted. Value-added tax (VAT), corporate taxes, and other levies like fuel taxes and sin taxes also play important roles. That covers the revenue aspect. There are disparities in tax contributions that we can delve into shortly.

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, funds primarily go toward essential services, with education being the largest expense, followed by interest payments and various grants. Therefore, funds are allocated for numerous purposes.

Another key factor in the budget is the fiscal deficit, which signifies the money borrowed by politicians on our behalf. This borrowing has caused alarmingly high state debt levels.

That summarizes our current situation. The tax burden is quite heavy on a narrow tax base in South Africa.

In simple terms, a small number of individuals bear most of the tax burden while a significant portion of the population—approximately 30 million of 65 million—receives monthly income from the state. Additionally, we need to remain vigilant about the rising levels of debt.

Read: Sars tightens its grip on tax penalties

Recently, the Minister of Finance has had to allocate more funds due to rising numbers of people depending on state support, increasing pressure on the South African Revenue Service (Sars) to enhance revenues, especially since the economy isn’t growing fast enough to meet these demands. This paints a vivid picture of the current fiscal policy situation.

DUDUZILE RAMELA: You mentioned that some individuals pay significantly more taxes than others. In terms of our tax-to-GDP (gross domestic product) ratio, what insights can you provide regarding the burden this represents?

DAWIE ROODT: The tax-to-GDP ratio is a bit complex to determine. The reason being that expenditures vary widely. To clarify, when discussing taxes and state expenditure, I’m specifically referencing national accounts. These accounts primarily fall under the Minister of Finance’s purview, while local governments or state-owned enterprises also contribute.

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

Focusing on national accounts, state expenditure as a percentage of GDP is around 32%, while revenue or the tax burden hovers just below 30%, typically around 28-29%.

The gap between these figures reflects the fiscal deficit, which is the amount the Minister of Finance borrows.

It’s crucial to remember that this deficit represents deferred taxes, and eventually, we will need to address this debt. Essentially, both revenue and expenditure contribute to our overall tax burden, indicating that over a third of our economy is allocated to state expenditure or taxes.

DUDUZILE RAMELA: During your presentation at the KragDag conference, you mentioned that a tax revolt is already in motion in South Africa. What insights from your client base indicate this trend?

DAWIE ROODT: Interestingly, the first documented tax revolt in South Africa dates back to the 1800s in Natal, where the Zulus protested against a poll tax—a fixed payment required of everyone.

Currently, we see that the tax burden has consistently risen over the years.

Now, total state expenditure has nearly doubled since 1970, showcasing the relentless expansion of government. While citizens want increased state spending on their behalf, they simultaneously resist higher taxes.

This contradiction is a fundamental issue in democratic systems: citizens support politicians promising to allocate funds for their benefit while opposing those imposing taxes to finance those services.

I’ve observed that individuals are becoming more proactive regarding tax planning. The resistance to toll roads exemplifies a grassroots tax revolt. When clients come to my office, their feelings regarding taxation are quite revealing. There’s a palpable sense of injustice surrounding the existing tax burden—an issue we could further investigate.

Moreover, the dissatisfaction stems not only from the tax burden; there’s widespread frustration about state expenditure.

Well-documented instances of corruption and mismanagement have prompted the public to question how their tax payments are allocated. Many express willingness to pay taxes if they perceive those funds being utilized effectively. Objectively, South Africa’s tax burden is higher than in comparable nations but lower than in advanced economies.

However, glaring inequalities persist, especially compared to European countries. The effects of fiscal redistribution are considerably weaker in Europe than in South Africa.

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

To clarify, the current setup means those contributing to the tax pool often do not directly receive the benefits, resulting in a scenario where wealth is transferred from the affluent to the less fortunate. My calculations suggest that South Africa has one of the highest redistribution effects in the world.

This isn’t necessarily unjust, given the multiple reasons behind it; however, it’s vital to note that those contributing to the tax pool may not benefit from that spending, which is often poorly managed.

Thus, discontent with the tax burden is unmistakable.

DUDUZILE RAMELA: President Cyril Ramaphosa has spoken about a social contract, suggesting that citizens may be more willing to accept taxation if they see tangible benefits. Unfortunately, our time for today has come to an end.

We appreciate your insights, Dawie. Drive safely, and thank you for joining us on Moneyweb@Midday. Dawie Roodt is the Chief Economist at Efficient Group.