The South African Institute of Chartered Accountants (SAICA) says South Africa should reconsider lowering its tax-to-GDP ratio and introducing a tax cap.
In a presentation to parliament this week, the group said the tax-to-GDP ratio is used as a measure of the extent to which the government controls a country’s economic resources and is a good indicator of a country’s tax revenue. country relative to the size of its economy. .
According to the World Bank, tax revenue above 15% of a country’s GDP is a key ingredient for economic growth and ultimately poverty reduction.
“Higher tax revenues mean a country is able to spend more on improving infrastructure, health and education – keys to long-term prospects for a country’s economy and people.
“So the higher the ratio, the higher the proportion of money that goes into government coffers; that is, a low ratio puts pressure on a government to meet its budget deficit targets.
South Africa’s ratio is estimated at 24.7% in 2021/22 and 25% in 2024/25.
However, it has become clear that South Africa’s tax revenue has (on average) increased despite weak economic growth, SAICA said.
“A high tax-to-GDP ratio is not a problem when taxpayers get what they pay for, but it is not currently a reality in South Africa.
“The Katz Commission in its third gear recommended a ceiling set at 25% as the maximum tax/GDP ratio. The goal is to manage when too high taxes become detrimental to an economy, as the Laffer curve theorizes.
The National Treasury has in recent years rejected this cap and questioned it, which is reasonable. However, it did not provide any research showing that taxes that are too high can never be harmful to the economy, the institute said.
The civil society group Outa has already published a paper on a tax ceiling and concluded that 18.6% is an appropriate tax-to-GDP ratio for the country. He added that parliament itself considered the issue in 1996 but has not since reviewed its recommendations.
“If the current fiscal policy was in fact wrong and harmful to the economy, it would be up to parliament to ensure that it is properly informed of this risk,” SAICA said.
“Statements made by the Minister, for example, that the return on raising taxes has been difficult to assess in recent years, as in some cases higher tax rates have not generated higher yields, have been made but the reasons for this have not been specified – is it hurting the economy or something else?”
Concrete evidence that South Africa is at the top of the Laffer Curve
The 2022 national budget provides concrete evidence that South Africa is at the top of the Laffer curve, says Tertius Troost, head of tax advice at Mazars.
The Laffer Curve is an economic theory that shows that if citizens are taxed at increasingly higher marginal rates, at some point tax revenue will begin to decline as people stop paying. The curve is used to illustrate the argument that sometimes reducing tax rates can lead to an increase in total tax revenue.
“The increase in the top tax rate from 41% to 45% for taxable income over R1.5m in 2017/18 appears to have generated significantly less than the projected R4.4bn per year “, said Troost.
“It shows that rate increases lead to emigration of wealthy people which has a negative effect on state coffers. It is encouraging to see that the National Treasury is keeping a close eye on this. »
Read: Updated projections of South Africa’s fiscal cliff
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