Are South Africans taxed to the max?
South Africans pay a lot of tax, but squeezing them further will hurt the country’s international competitiveness
Strictly speaking, South Africans are not shouldering one of the heaviest tax burdens in the world. But the country is an outlier among emerging markets, suggesting there is little scope to hike taxes further and remain internationally competitive.
Readers responded strongly to a recent FM opinion piece by Mike Schüssler of Economists.co.za (Budget, February 21). In it, he argued that SA has the ninth-highest tax-to-GDP burden in the world.
Philippe Burger, an economics professor at the University of the Free State, disagrees with Schüssler’s interpretation of the statistics.
According to the latest International Monetary Fund (IMF) data (for 2016), SA’s central government tax revenue stands at 26.4% of GDP. This puts SA in seventh place on an international list of 72 countries, with Iceland topping the list at 37.75%, Denmark second at 34%, the Seychelles third at 31.6% and Sweden in fourth place at 27.8%. SA even outranks the UK, which at 25.5% is in 11th place, Brazil, which is in 61st (12.8%) and the US, which ranks 66th (11%).
However, Burger says one has to cast the net wider to understand the real tax burden of a country, as central government tax revenue excludes social security contributions and taxes collected at lower tiers of government, such as provinces and local authorities. Extensive welfare states collect vast sums in social security taxes — to pay unemployment benefits, old-age pensions and disability grants — so excluding these heavily distorts the true picture.
In SA, on the other hand, social security taxes take the form of Unemployment Insurance Fund contributions, which in 2016 accounted for just 1.7% of GDP.
France tops the list when it comes to social security contributions — they constitute 26% of GDP there. In Belgium that figure is 21.5% and in Finland 21.3%.
Similarly, while SA’s provinces and municipalities generate little in the way of tax revenue, countries like the US, Canada, Germany and Brazil are federations in which a large amount of tax is collected by lower tiers of government. For instance, the US’s low IMF ranking (66th) is distorted by the measure excluding all the personal income tax collected by individual states such as New York and California.
So to get a more complete picture of a government’s claim on the economy, one needs to include the revenue collected by the state as a whole and not just central government, as per the IMF ranking, says Burger.
Doing so places SA in 33rd place, almost halfway down the IMF’s list of 72 countries. Top of the list are, predictably, the Scandinavian welfare states (Iceland, Norway, Denmark and Finland), followed by France and Belgium. The total general government revenue burden in these countries is between 50% and 57% of GDP. In SA it is 38.3%.
Looking at it this way, South Africans are not carrying one of the heaviest tax burdens in the world.
As one would expect, of the 32 countries with heavier tax burdens than SA, 22 are developed (OECD) countries and four are transition economies in Eastern Europe with higher per capita incomes than SA.
However, Burger cautions that SA is highly taxed for an emerging market, with only five emerging economies carrying heavier tax burdens: Brazil, Cyprus, Tonga, Malta and the Seychelles.
Brazil comes in at 61st place when using narrow, central government tax data, but leapfrogs over SA to 20th place (with a tax burden of 41.4% of GDP) when the bigger tax picture is considered.
No matter which way I look at it, South Africans are highly taxed and get back very littleMike Schüssler
On the other hand, there are 20 emerging markets that collect less tax than SA, including China, Thailand, Indonesia, Kenya and Uganda.
Even more worrying is that SA also has a higher tax burden than the US, Switzerland, South Korea, Australia and Israel, all developed economies.
"This suggests there is little scope for SA to increase tax rates in future," says Burger. "The top marginal personal income tax rate of 45%, the corporate income tax rate of 28% and the VAT rate of 15% are probably as high as they can go without SA becoming less competitive relative to its peer emerging-market rivals."
Schüssler replies that he focused on tax, excluding nontax revenue (like toll fees) and social security contributions, because the latter are not compulsory in SA, and are collected by pension and retirement funds, not the taxman.
Nevertheless, South Africans contributed 5.13% of GDP to pension funds in 2017. "That is a large amount that is subtracted from salaries every month," he argues.
According to the comprehensive International Centre for Tax & Development (ICTD) database, SA has the 45th-highest total revenue-to-GDP ratio of 193 countries when social security payments to the government are included.
This is a similar result to that shown by the IMF data.
However, Schüssler estimates that once SA’s pension contributions to private funds are added, SA rises from 45th place to 23rd place.
What it means
SA taxes more heavily than 20 other emerging markets and five developed countries
"To obtain a decent health-care level we need to add perhaps the medical insurance many South Africans pay too, which is about 3% of GDP." Including these contributions would take SA even higher up the rankings — to 15th place.
However, one cannot add in SA’s private pension or medical aid contributions if one doesn’t include the private contributions of other countries too. Also, social security systems have a redistributive element that is lacking in private pension schemes.
But Schüssler is sticking to his view: the best way to compare tax-to-GDP ratios in the case of SA is to exclude social security payments altogether. Doing this, SA is the 12th-most taxed country in the world on the ICTD database. "No matter which way I look at it, South Africans are highly taxed and get back very little," he says.