NICHOLAS WOODE-SMITH: Increasing the tax burden won’t fix SA

Efforts to increase the tax burden on already overtaxed South Africans will not help our floundering economy and will only serve to further stifle economic growth.

The R22bn tax shortfall has caused the National Treasury to seek new plans to raise additional tax revenue. Unfortunately, rather than focusing on creating more wealth through sound economic policy, the government is fixated on further burdening the existing tax base with more taxes, including the ideologically motivated wealth tax.

The National Treasury is already planning to drastically increase taxes, remove tax incentives and focus on enforcing compliance in 2025. While the increase in the number of VAT zero-rated items is welcome, and combating illicit financial flows should be a given, a general increase in taxes will not help South Africans.

Increasing corporate income tax to 28% will only chase away the profitable companies that are needed to create jobs and produce wealth. Targeting wealthy individuals, who already pay high rates of tax with even more taxes on their wealth, inheritances, estates and luxury imports, will just chase these valuable taxpayers away too.

Removing tax incentives such as medical tax credits and other tax breaks will not raise revenue. It will only make taxpayers more resentful and chase them away. Just 3-million South Africans pay 90% of income tax. On top of this, we are burdened with a host of other invasive taxes. Taxes on savings and investment, on what we purchase locally and from overseas. We’re taxed for working, our employers are taxed for allowing us to work. We’re taxed when we commute to work through the fuel levy. We’re taxed when we die, and our heirs are taxed again. 

We pay a host of tariffs and duties on goods from overseas, and the companies we purchase goods from are taxed again and again, increasing the cost of their goods. And our savings are taxed unofficially as the Reserve Bank increases the money supply, eroding the value of our money through inflation. 

The most heavily taxed have to pay more than 45% of their income already. Now the government wants to increase this tax burden with a new wealth tax, while reducing tax breaks and actively incentivising avoidance. 

Worst of all, despite our heavy tax burden, SA has little to show for it. Very little of what is publicly budgeted is spent properly. Money disappears into corruption, incompetence and overpaid public employees.

It is no wonder that many South Africans don’t want to pay tax. They work hard, having to pay extra for private healthcare (which the government wants to destroy), private security (as the police do nothing) and often private schooling, and then have to foot the bill for a minister’s new fleet of BMWs. 

There are four times as many social grant recipients as there are taxpayers. The National Treasury estimates that it will spend R266.21bn on social grants in the 2024/25 tax year. That is an enormous expense that will be funded by a dwindling tax base. 

Overtaxation holds back economic growth. Not only does an overly large tax burden with little to show for it breed resentment and capital flight, but increased taxation extracts wealth from more productive members of society and in effect destroys it. 

Corporations that create jobs, produce valuable products and invest in creating more wealth for the country end up losing money to corporate income tax that should ideally have been used to grow their operations. In a country with an overwhelming unemployment problem we need to enable employers as much as possible, not just take their money to throw into a corruption pit. 

Removing medical tax credits also multi-taxes individuals. Already taxpayers are funding a failing public healthcare system, while also paying for their own private healthcare, which also pays its own tax. By not even giving a bit of an incentive to these individuals, the government is burdening taxpayers over and over. 

The government’s obsession with chasing high wealth individuals is also fraught with ideological malice. High-income earners already pay more tax than anyone else. That’s how percentages work. Even if a millionaire was to pay 10% tax, they would still be paying more than most South Africans. A sliding scale tax rate, often called a progressive tax rate, increases that burden still further.

Increasing the tax burden on a minority of South Africans, no matter how rich they may be, will not help to grow SA’s wealth. If anything it will only shrink our growth prospects. Rather, we need to focus on producing wealth and growing the economy. 

Instead of trying to chase a few wealthy taxpayers who can afford to escape the country if the tax burden becomes too great, policymakers must focus on implementing market-friendly policies that will enable more people to become taxpayers. 

Imagine if the millions of unemployed got jobs and became tax compliant. Not only would their lives improve as they earned a steady income, their spending will further increase the profits of companies that also pay tax. Millions of additional individuals in the workforce, earning and spending, will produce far more tax revenue than could ever be generated by an ideologically driven attack on a few wealthy individuals. 

On top of this, the government has to cut unnecessary spending. Fruitless and costly endeavours such as the planned National Health Insurance must be scrapped. Expensive and ineffective parastatals must be privatised or closed. Most government departments and ministries could be scrapped or merged.

An approach to cost-cutting similar to Argentina’s Javier Millei will go a long way to balancing the budget. That is how we save SA. Create wealth, don’t tax it. 

• Woode-Smith, an author, economic historian and political analyst, is a senior associate of the Free Market Foundation. He writes in his personal capacity.