Case for a flat tax in South Africa
South Africa has a progressive tax system which is a common practice globally, with the tax rate increasing as income increases.
However, Mauritius shows that a flat tax system may be more effective in stimulating economic growth and development.
There are strong debates about which tax system is the correct one. Politicians, economists, and social activists have big differences in opinion on how to create the best society using taxes.
Some argue that a flat tax is the best system because it treats everyone equally, as every citizen pays the same proportion of their income.
Others argue that wealthier people should pay a higher percentage because resources should be redistributed more equitably across the population.
A good tax system requires the efficient and cost-effective collection of money to fund the state’s endeavours. It should also be viewed as equal by the citizens and be non-distortive.
There are three predominant tax systems which have been implemented in various forms.
Flat taxes
Under a flat tax system, all taxpayers pay the same percentage of their income – regardless of how much money they earn.
The tax rate does not change as one’s income increases or decreases, yet the absolute amount of tax will increase as one’s income increases.
| Income (R) | Tax rate (%) | Tax burden (R) | |
| Person 1 | 50,000 | 10 | 5,000 |
| Person 2 | 100,000 | 10 | 10,000 |
| Person 3 | 200,000 | 10 | 20,000 |
Regressive taxes
Under this system, high-income taxpayers pay a smaller fraction of their income than low-income earners.
As one’s income increases, their tax rate decreases. Thus, the tax burden should not increase proportionally to your increase in income and, in some cases, not at all.
This kind of tax system is very rare but can be seen in some cases, particularly with sales taxes.
| Income (R) | Tax rate (%) | Tax burden (R) | |
| Person 1 | 50,000 | 10 | 5,000 |
| Person 2 | 100,000 | 5% | 5,000 |
| Person 3 | 200,000 | 2.5% | 5,000 |
Progressive taxes
A progressive tax system is the most commonly applied globally and is the system currently applied in South Africa.
Under this system, high-income earners pay a larger fraction of their income than lower taxpayers. As one’s income increases, so does one’s tax rate.
This is based on the ability-to-pay principle, whereby it is argued that taxes should be levied on people according to how well they can carry the burden.
Effectively, it is the idea that wealthier people should pay more because they can afford to.
| Income (R) | Tax rate (%) | Tax burden (R) | |
| Person 1 | 50,000 | 10 | 5,000 |
| Person 2 | 100,000 | 12.5% | 12,500 |
| Person 3 | 200,000 | 15% | 30,000 |
The case for a flat tax
A flat tax system is seen as inherently equal, as everyone pays the same proportion of their income and is treated the same.
Flat tax systems are uncommon globally. However, Mauritius provides an interesting case study of applying such a system and its potential benefits.
Mauritius has a flat tax rate on individual income of 15%, with a reduced rate of 10% for individuals who earn less than MUR 650,000 annually.
The same rate applies to corporate and interest income, making the tax regime extremely simple. This increases compliance and reduces tax evasion as one cannot structure one’s taxes to reduce it.
The country also has zero capital gains tax, no dividend withholding tax, and no inheritance or estate tax.
Mauritius has become a very attractive destination for foreign investors and businesses, ranking first in Africa for ease of doing business and 20th in the world.
According to PwC, Mauritius’ tax system has attracted considerable foreign investment and has one of Africa’s highest per capita incomes.
The country has developed from a low-income, agricultural economy into a middle-income, diversified economy with burgeoning tourism, textile, and financial services sectors.
Mauritius has managed to grow its economy at over 5% per annum, reducing income inequality, improving life expectancy, and reducing infant mortality.
Foreign Direct Investment (FDI) in Mauritius was over $400 million last year, with investment as a share of GDP growing to 18.7%.
Although Mauritius’ success is also linked to its business-friendly policies and stable political environment, its simple and low tax regime played a vital role in its economic growth.
