South Africa remains under-taxed by about 7% compared to other developing countries, an amount equivalent to R70-billion a year, according to a study by the Economic Policy Research Institute in Cape Town.
“There is significant room for the country to raise more revenue, especially if you believe that the resources can be productively invested,” says institute director Mike Samson. The research document, authored by Ingrid van Niekerk, is to be released soon.
Given the country’s pressing social needs, Samson believes there is a need to close the gap. His finding contrasts sharply with the view widespread in business circles that South Africa is overtaxed, to the detriment of competitiveness and investment.
The study compares expected tax revenue to actual revenue collected for 50 developing countries. It finds that South Africa has the capacity to collect revenue equivalent to 31% of gross domestic product (GDP), but currently only collects 24%.
Only Indonesia, Jordan, El Salvador and Thailand have larger gaps.
The government’s 1996 growth, employment and redistribution (Gear) policy commits the country to collecting 25% of GDP in tax. The levels of taxation proposed by the study, Samson says, can be attained without necessarily hampering South Africa’s competitiveness, especially at levels of up to 27%.
He believes that the vast improvement in revenue collection by the South African Revenue Services (SARS) has had a huge impact on the fiscus, but that work in many areas of revenue collection is still required.
This week Parliament’s finance committee scrutinised the Taxation Laws Amendment Bill, which will scrap tax deductions on a range of benefits, including entertainment and subsistence allowances. Samson welcomed this move, noting that the benefits were wider than the R100-million the legislation would net the SARS.
“The R100-million is a drop in the ocean” he says. “But this [amendment] closes loopholes that are open to abuse, makes the tax system simpler and saves companies on accounting services.”
Samson believes that a good starting point in bridging the taxation gap is to continue closing loopholes that allow for tax avoidance and evasion.
Estimates show that tax avoidance and evasion cost the country between R15-billion and R45- billion a year. The next step, Samson says, should be to continue reviewing both the personal income tax and corporate tax systems.
“One area where the SARS has made significant progress is in achieving horizontal equity,” says Samson. Horizontal equity implies that two taxpayers earning roughly the same pay roughly the same amount of tax.
Samson says an area needing significant improvement is that of vertical equity, which applies when a taxpayer moves up the earnings scale.
At present the personal tax scale is seen as regressive at the top, where the highest 5% of income-earners pay a lower percentage of their income in tax than the next 5%. “You can raise revenue by making the tax system more progressive.”
The personal tax reform that has met fiercest opposition has been capital gains tax. Samson concedes that opposition is understandable, but insists the tax itself makes sense. He points out that three-quarters of capital income is still tax-exempt, and the taxable quarter is taxed at 40%. Ordinary income above R240000 a year is also taxed at 40%, but all of it falls within the tax net.
Corporate income presents another opportunity to close the tax gap. In last year’s Budget speech, Minister of Finance Trevor Manuel noted concern over disparities between sectors in meeting the 30% corporate tax requirement. A notable example is the banking industry, where banks use derivatives to defer tax payments.
The principal concern guiding tax policy is its effects on consumer spending and emigration.
Samson notes that studies conducted among South Africans who have moved abroad show that taxation levels do not feature prominently among the reasons for emigrating. The destinations chosen by emigrants, largely the United Kingdom, the United States, Canada and Australia are, in fact, more highly taxed than South Africa.
Taxes also affect levels of investment. “But there is a trade-off,” says Samson, noting that inadequate economic infrastructure — which can only be remedied by state spending — is just as likely to scare off investors as tax levels.
South Africa should exploit revenue opportunities to improve its infrastructure, he says.