2015 article content – Yesterday, while Minister Nene (remember him) was doing his thing in parliament with all those EFF-student-stun-bombing backing vocals, I got a bit prickly when he started talking about “tax evasion” and “profit-shifting”. There’s a strong vilification narrative there, and I think that it’s worth evaluating.

To be clear, of course I believe that there is a need to re-dress South Africa’s past. We need transformation and equality and the re-balancing of privilege. I don’t think that you’ll find too many people disagreeing with that.

But this demand needs to be balanced against what is already happening.

So to illustrate that, let me give you some numbers.

Based on National Treasury’s 2015 budget projections,

here is a picture of who pays income tax out of South Africa’s population of 53 million people:

tax-who-pays-tax-in-south-africa

 

Based on their income brackets, I’ve also done some splitting into classes:

taxpayer-population-split

A note: taxpayers who earn less than R70k per year do not pay any income tax…

Here is how much income tax is collected from each class:

tax-total-income-taxes-collected-per-class

 

And allow me to take those tax collections and relate them to the number of taxpayers in each class:

tax-average-tax-paid-by-taxpayer-in-each-class

 

On the basis of personal income tax, the top 1% or so (the 800,000 people earning more than R500,000 per year) pay 61% of the total income tax bill.

And I just want to point out that, by almost any standard, this is an extraordinary burden to lay on such a small portion of the population.

If we compare South Africa to the United States:

  1. Both countries pay taxes that equal about 25% of their annual GDP.
  2. But do you remember Mitt Romney and his “47% of Americans don’t pay any income taxes” comment that caused such an uproar?
  3. Compare that to our 87% who don’t pay income tax.
  4. And in 2010, the top 1% of taxpayers in the US contributed about 37% of the total income tax bill.
  5. Compare that to the 61% mentioned above.

And this is only part of the story.

The other side is what the government spends its money on. Because as I mentioned a few weeks’ ago (in this post), there are some countries in the world that manage to collect plenty of income tax (almost 50% of their GDPs). And it seems that the reason they have such a willing tax base is because those States deliver good and reliable services to their people, both the taxpayers and the non-taxpayers alike.

So here is how the South African government spends its money (based on those same National Treasury 2015 budget projections):

tax-government-spending-by-function

 

But that’s just a description of general government functions. Here is a breakdown of that spending by economic purpose:

tax-x-government-spending-by-economic-classification

 

Here is the issue:

  1. In countries where lots of tax is collected, taxpayers get benefits in return for their taxes.
  2. Looking at the above breakdowns of government spending, where are the benefits for the actual taxpayers?
  3. For my money, there are very few.
  4. In general, you could say that the average taxpayer gets the most benefit from “general public services” and “defence, public order and safety” – which accounts for less than a fifth of government spending. And even then, it’s not something that’s especially tangible.

I guess what I’m trying to say is: most of the government budget is already “transformational”. When young activists talk about privilege and needing to pay for it, the point is: it is already being paid for.

If we say that about 20% of tax money gets received back by taxpayers as benefits (in the form of safety, a police force, infrastructure, etc), then the other 80% is essentially punitive. In some ways, it is more like a fine that one pays for being privileged, or for not needing transformation. It gets handed over in return for no tangible benefits.

And that needs to be recognised, because

  1. You cannot indefinitely fine the privileged for being privileged;
  2. If you do it for long enough, then the privileged will just take their privilege elsewhere;
  3. You will alienate your tax base if you’re not offering real tangible benefits in return; and
  4. If you’re relying on 1% of the population to be almost two thirds of your income tax base, then you had best get your spending in order. Because you are vulnerable, and they may leave.

A Post-Script Update

This post has been up for almost two days now, and I just wanted to clarify two points:

  1. Yes, I know that there is more than just “Income Tax” in the government revenue plan. I have written about the other taxes here: How South African Non-Income Taxes Are Paid. Unfortunately, I am only one man with one blog – I can’t write all the posts in one day! But I think you’ll find that the rest of the fiscal plan is designed to support the re-distributive structure of the Income Tax, not undermine it.
  2. Secondly, I’m not trying to make a moral argument about whether it’s right to pay this amount of tax, or whether more needs to be paid, or less. It’s just important to point out that the tax base are contributing far more than many other countries would be able to take. Just in a practical sense, you can’t force people to stay here and pay that if they choose to emigrate – so how can we afford to ignore that fact?

Source: Rolling Alpha posts about finance, economics, and sometimes stuff that is only quite loosely related. Follow me on Twitter @RollingAlpha, or like my page on Facebook at www.facebook.com/rollingalpha. Or both.