Fifteen years ago, 78% of personal income tax was paid by 32% of taxpayers. Now 80% of all personal income tax is paid by 25.7% of taxpayers. This is an unsustainable picture, with the personal income tax to GDP ratio now at 10%, significantly higher than the Organisation for Economic Co-operation and Development average of 8%. It is not unsustainable only because it is high relative to other countries. It is unsustainable because, as economists and taxpayers know well, there is only so much tax individuals are prepared to pay before they look for ways of evading payment.
In economics, this is described by the Laffer Curve, which illustrates the premise that the more an activity is taxed the less revenue it generates. In everyday parlance it is known as being gatvol.
That middle class and wealthy taxpayers are genuinely gatvol was illustrated in a graph circulated ahead of the budget by accounting firm PWC. The graph, which illustrates the main budget tax to GDP ratio, shows that despite increasing tax rates government revenue has stalled at 26% for the past three years.
In other words, higher taxes are not leading to more revenue, in all likelihood because the behaviour of taxpayers is changing.
Also worth noting is that the tax reforms introduced in the 2000s, which lowered rates of personal income tax and had been made possible by better collection and better compliance, have been reversed completely.
The tax contributed by individual taxpayers is back up at levels last seen in 1999-2000.
The limits of raising personal income tax have been reached just as many jurisdictions in the world are lowering corporate income tax, making it difficult for governments to squeeze more revenue from that avenue. Raising corporate income tax tends to be the most damaging economically as it dampens investment and with it job creation.
As we know from the medium-term budget policy statement in October, the past year of lower than expected growth and chaos and strife at the South African Revenue Service left the Treasury with a R50bn hole in the budget.
Having stretched its other options to the limit, the government is now left with little choice but to raise the rate of value-added tax (VAT) to 15% in the budget. As VAT is generally known as a regressive tax and penalises the poor, who spend a greater portion of their income on consumption, disproportionately this will be a politically unpopular move.
Cosatu has warned it expects the government "not to throw the working and middle classes under the bus with VAT and income tax hikes". Its argument is valid: "Workers are not the ones who looted Eskom, SAA [South African Airways] and the state. They should not be expected to pay for those who have stripped the state."
Sensibly, it also argues that the government needs to look to the billions identified by the auditor-general as "unauthorised and fruitless" expenditure to meet its revenue needs. Realistically, it will take some time before accountability and systems are restored to state departments.
Managing this opposition to increased taxes will be the first hard test of the Cyril Ramaphosa administration. After the elation that followed his election and his triumphant and unifying state of the nation speech, Wednesday’s budget is the reality check.
No one, but those who stole and plundered, should be made to pay the price of the Zuma-era looting. Sadly, though, we all will. The government has painted itself into this corner and in the painful grasp of the pliers of all balance sheets it only has two options: cut government expenditure or raise taxes. The first instinct of governments everywhere is to hike tax because this is easier than reducing expenditure. But as we now know, that only goes so far. This, unfortunately, is the hangover that will linger for some years, perhaps even permanently.