A flat tax of 23.7% can replace all other taxes in South Africa

An analysis by Daily Investor revealed that applying a flat tax rate of 23.7% on only three revenue streams can replace all other taxes in South Africa.

The National Treasury’s tax revenue revealed that in the 2023/24 financial year, it raised R1.73 trillion in tax revenue.

81% of the R1.73 trillion tax revenue was raised from three sources – personal income tax, corporate income tax, and value-added tax.

All the other taxes, which are exceedingly complicated and difficult to administer and collect, account for only 19%.

Simplifying South Africa’s tax regime will create a business-friendly environment, increase compliance, and fuel economic growth.

It raises the question of what a simplified tax regime in South Africa may look like if the country needs to generate the same revenue.

One option is introducing a flat tax rate on the three main revenue streams and eliminating all other taxes.

This is not as far-fetched as it may seem. Mauritius has a flat rate of 15% on personal income tax. The same rate is applied to company profits and value-added tax (VAT).

Introducing a flat tax rate on personal income and companies is inherently equal, as everyone pays the same proportion of their income to the state.

It removes destructive political games, like targeting the rich to win votes. The government cannot lift taxes without creating anger among all its citizens.

It raises the question of how much South Africans will need to pay in taxes if the government introduces a flat tax rate. The answer is: 23.7%.

A 23.7% rate on personal income tax, VAT, and corporate income tax will generate the same revenue as the myriad of taxes in South Africa.

This flat rate means that companies and millions of salary earners will pay less tax than they do now.

Workers who are currently below the personal income tax threshold will still not need to pay any tax on their salaries.

The biggest impact will be on VAT. Although a 23.7% VAT rate is much higher than the current 15%, it will not be the highest rate in the world.

Hungary has a VAT rate of 27% and Finland charges 25.5%. Numerous other countries, including Sweden, Denmark, Croatia, and Norway, are on 25%.

While VAT will increase, the price of many products will decrease because of the removal of taxes.

There will be no fuel levy, which means petrol and diesel will be much cheaper. Liquor and cigarettes will also enjoy big tax cuts because there will be no sin taxes.

Imported products will be more affordable, car prices will decrease, and sugary drinks will be cheaper.

It will also be easier and more affordable to buy and sell a house, and South Africans will not need to pay tax on the capital gains from their investments.

The benefits of a simplified tax regime far outweigh the disadvantages. However, it is unlikely to see the light of day.

Politicians love to use tax as a political tool to gain votes. Dividing people into groups and applying different taxes to these groups is a powerful tool on the campaign trail.

A good example is the proposed wealth tax, which regularly appears in government and political discussions.

Wealth taxes are notoriously ineffective and chase rich people, businesses, and capital out of a country. It should be a non-starter.

However, envy is a fantastic political tool for gaining support, and talking about wealth taxes takes advantage of this powerful emotion.

South Africa’s complicated tax regime is a great hindrance to economic growth. To expect it to change anytime soon, however, is misguided.