Dawie Roodt’s tax warning for South Africa

Economist Dawie Roodt has warned that South Africa is over the Laffer Curve, leaving no room for the National Treasury to implement further hikes to the country’s major taxes.

This will make it highly difficult for the Treasury in South Africa’s upcoming budgets, as the state will need additional income streams to fund its ambitious spending.

South Africa’s high tax rates have already led to increased levels of evasion, which has become particularly prominent in areas like sin taxes on cigarettes.

Roodt warned that any further tax increases would lead to even greater evasion and could prompt wealthier South Africans to leave the country.

In a recent interview with BizNews, Roodt explained what the Laffer curve is and where South Africa falls in relation to it.

Simply put, the Laffer Curve is an economic principle that suggests that if tax rates are increased above a certain level, tax revenue can fall.

This can be for a variety of reasons, including higher levels of tax evasion, wealthier citizens leaving the country, or some people simply choosing to work less.

According to Roodt, South Africa has passed the Laffer Curve with regard to personal income tax, with no more room to hike without risking these consequences.

He explained that South Africa cannot risk this happening, as the country’s tax base is already small, with very few people contributing the majority of the state’s personal income tax revenue.

Just under 1 million South Africans, or around 1.5% of the population, pay an estimated 60.9% of all personal income tax, the government’s biggest revenue generator.

Roodt pointed out that wealthy South Africans are also not receiving the most benefits from state expenditure.

“The fiscus in South Africa is probably the most redistributional fiscus in the world, taking from the so-called rich to give to the poor, than any other country as far as I’m aware of,” he said. 

Therefore, South Africa runs a high risk of driving these rich citizens away or pushing them to more aggressive evasion tactics if it raises taxes even further.

The Laffer Curve can be seen below. Roodt believes South Africa has crossed the ‘revenue-maximising point’, entering the region of declining revenue with regard to personal income tax.

Other tax measures

Roodt explained that the high rates of tax evasion that could result from further tax increases pose a real risk, given that South Africa is already experiencing elevated levels of evasion.

He explained that this does not only apply to personal income tax, with sin taxes, in particular, subject to high rates of evasion.

The SA Tobacco Transformation Alliance (SATTA) has estimated that, in 2023, South Africans smoked 37 billion cigarettes, but the South African Revenue Service (SARS) only collected tax on 13 billion.

SATTA estimated the lost revenue to be at least R24 billion, as excise tax is around R1 per cigarette.

The organisation explained that South Africa’s illicit cigarette market now represents between 65% to 70% of the total market – the highest in the world.

This has presented a significant challenge for the taxman, with the Organisation for Economic Cooperation and Development estimating that South Africa loses up to R88 billion a year due to illicit trade.

Echoing Roodt’s sentiments, SARS Commissioner Edward Kieswetter previously warned that tax increases are not the answer to the government’s budget deficit and could do more harm than good.

Kieswetter told BusinessDayTV in 2023 that the additional tax revenue the government needs can be collected through a more efficient revenue service, and a tax increase is not necessarily the solution.

“That’s our focus – to continue to work hard and use the money we get from the Treasury in the budget allocation to improve revenue collection,” he said.

The taxman warned that any increase in taxes in South Africa will result in a decline in tax compliance, which the country cannot afford as its financial health steadily deteriorates.

“It will affect compliance behaviour, and you cannot afford that. What we saw when VAT was put up to pay for free education was a proliferation of VAT fraud and people fiddling with their taxes,” Kieswetter said.