South Africa has passed its breaking point with taxes

South Africa’s tax system is not suitable for a developing country because it is complex and difficult to comply with. 

This results in a highly concentrated tax base that can afford to comply with the country’s tax system and go through the rigorous administrative process. 

Furthermore, the revenue generated from this small tax base is redistributed to lower-income households, leaving those who paid the tax with little to show for it from the state. 

These individuals and companies, which make up most of the local economy, have passed their breaking point, Efficient Group chief economist Dawie Roodt argued.

Roodt made these comments during a pre-Medium-Term Budget Policy Statement presentation with Unicus Tax Specialists. 

He explained that many taxpayers are structuring their affairs to minimise their tax liability, largely through taking money offshore and by using trusts. 

Roodt explained that the cost of compliance makes the investment in reducing their tax liability worthwhile, as they can benefit from the system’s complexity. 

As SARS squeezes more and more revenue from these individuals and companies, the financial benefit of restructuring their affairs becomes more attractive. 

Roodt said this is a function of the highly concentrated nature of South Africa’s tax base and the government’s intense focus on redistribution. 

A small number of companies and individuals provide the lion’s share of tax revenue in South Africa, yet they do not experience any benefit. 

“The fiscus in South Africa is particularly redistributive. The expenditure is not benefiting the people who paid the taxes,” Roodt said.

He estimated that 30 million South Africans depend on the state for their monthly income, including government employees, who account for 17% of the country’s GDP in wages. 

“The current tax system does not fit a developing country like South Africa. The tax mix is wrong. The burden is heavily skewed,” Roodt said. 

“The country is already beyond the optimal tax rate for personal income tax, corporate income tax and value-added tax. It undermines economic growth directly.” 

Too expensive to comply

Apart from the elevated tax rates South Africans have to pay, Roodt said the local tax system is too complex and expensive to comply with. 

This makes it difficult for South Africans who want to comply with SARS to do so, particularly if they are lower-income individuals. 

Given how little they receive in return from the state, it is not worth their time or resources to comply with the tax regime. 

“I will fix this tax regime without necessarily lowering the tax bill, but I would make it the simplest,” Roodt said. 

“I will make it the easiest to comply with and the least complicated tax regime in the world. That is what I would do first.” 

To achieve this, Roodt would first strip every single exemption, deduction, and rebate from personal income tax. 

“You will still have personal income tax, but I would reduce it to only tax on the income an individual makes. No deductions, no rebates, nothing. Simple and straightforward,” Roodt said. 

This would be followed up with the elimination of all food items that are zero-rated for value-added tax. This list includes brown bread, maize meal, fresh fruit, milk, and eggs. 

The elimination of this, with the streamlining of personal income tax, would significantly ease SARS’ administrative burden and make the tax regime more efficient. 

It would also make it easier for individuals and businesses to comply, enhancing tax revenue without SARS being aggressive. 

Roodt said this would make it financially unviable for individuals to invest in structuring their affairs to reduce their tax burden. 

There would be no loopholes for them to find or deductions to qualify for. Importantly, it would be far cheaper to just comply with the tax regime.

Currently, this is not the case in South Africa, where high-income individuals find it worthwhile to invest in reducing their tax burden. 

“If you have some money to take out of the country, then you can legally structure your investments in a way that reduces your tax burden in South Africa,” Roodt said. 

“Externalise your business if you can and move the head office to the Seychelles or Mauritius or wherever, because we are overtaxed here.”

While this is expensive and an administrative burden, it will yield significant benefits in terms of reduced tax payments to SARS.