Louw Pienaar

Position: Senior Agricultural Economist

Institution: Western Cape Department of Agriculture

Expertise: Agricultural Development and macroeconomic research

Louw is an agricultural economist at the Western Cape Department of Agriculture at Elsenburg. Working in the division for macro and resource economics, he is involved in multi-sector analysis and research on economic impacts on agriculture in South Africa and the Western Cape. He is interested in rural development and the role of agriculture in development and food security. Louw holds a M.Sc. in agricultural economics at the University of Stellenbosch and have been involved in research with the Bureau of Food and Agricultural Policy (BFAP) since 2010. Other fields of study include International Trade, Livelihood and Poverty analysis and Labour market outcomes within an agricultural context.

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Editor's Corner

What tax can - and can't - do

An examination of South African tax statistics tells an important story about both inequality in the country and the efficacy of tax in countering it.

Nearly 80% of all personal and payroll taxes in the country are paid by the top ten percent of income earners. It is government’s most important tax instrument, equivalent to 8.7% of GDP, and accounting for 39% of all tax revenue in 2020. In comparison, Corporate Income Tax (CIT) and VAT are 4.6% and 6.5% of GDP respectively. Both CIT and VAT have decreased as a proportion of tax revenue since 2011.

Some debates in the media have focused on the legitimacy of our relatively high tax rates – South Africans in the top decile spend about 20% of their market income on tax, second only to Tunisia where the figure is 27%. There is a strong argument that South African taxpayers don’t get “value for money”. Another argument focuses on the way in which institutions have been undermined, particularly in the state capture period. And there is at least one targeted tax boycott – namely of the Gauteng e-toll system.

But “value for money” is a relative concept in the world’s most unequal society. The bulk of the tax collected is used, not for services for the rich, but to redistribute to the poor.

In this edition of Econ3x3, Maya Goldman and Ingrid Woolard, argue that South Africa has one of the most progressive tax systems in the world.

South Africa is one of the few countries that uses direct taxes as a means of redistribution. Direct taxes have had a measurable impact on inequality reducing it in 2020 to 2011 levels in spite of a rise in income inequality before taxes.

A policy of redistribution – through such programmes as social grants and free basic services – has also reduced poverty (in 2015) by six percentage points at the Upper Bound Poverty Line, affecting 3.3 million people.

So, in fact, while the better-off may complain that they do not get the commensurate services for the tax they pay, poorer people are getting services and support that often keeps them from slipping into dire poverty.

However, Goldman and Woolard find that our tax has become slightly less progressive in the past decade. This is because, despite an increase in tax rates, the market share of income for the richest 10% has increased from 62.7% in 2011 to 64.3% in 2020, while the share of market income that goes to the remaining 90% has decreased from 37.3% to 35.7%.

Thus market incomes of the top decile have increased at a greater rate than taxes. In this sense, tax has become slightly less progressive. The Covid-19 pandemic and consequent lockdowns are likely to have exacerbated this trend.

There are two lessons from this: one is that the government needs to continue to focus on progressivity in the tax system; but the other is that taxation alone can’t solve the problem of inequality. Focused attention on issues such as the quality of public education and structural unemployment must be among the key policy priorities.

Pippa Green

June 22, 2022

Working Papers from the REDI3x3 project are available HERE

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Articles

What tax can - and can't - do

READ, WRITE & REASON

Creating jobs, reducing poverty I: Why the informal sector should be taken seriously and enabled properly

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