Renewed emigration by skilled and high-income earners poses a threat to South Africa’s fragile tax system, according to the continent’s biggest bank.
“South Africa’s tax system rests on a pinhead,” Goolam Ballim, chief economist at Standard Bank, said Thursday.
“Emigration is a budding threat to South Africa’s public finances given the disproportionate reliance on a few hundred thousand individuals who contribute the bulk of South Africa’s tax take — not just income taxes, but also indirect taxes”.
Fewer than 16 million individuals in a working age population of 40 million are registered income taxpayers, National Treasury data show. About 330,000 individuals earn more than R1 million annually and pay 41.5% of all personal income levies.
The country’s small tax base is a symptom of South Africa’s extreme inequality, a legacy of the apartheid system of racial discrimination that disadvantaged the Black majority and ended in 1994.
A sluggish economy, chronic electricity shortages, policy paralysis and laws that make it difficult for businesses to create jobs have since added to the problem and are pushing affluent South Africans to seek better prospects abroad.
While the progressivity of the income-tax system in South Africa — where top earners pay higher levies — should be celebrated because of extreme inequality, it’s also a vulnerability, Ballim said.
“It’s those high-income individuals who contribute disproportionately that are elevatedly mobile and therefore can hollow out the system very quickly.”
About half of the nation’s top earners and university graduates considered emigrating last year as citizens lost faith in the country’s future, according to a survey by the Social Research Foundation.
Nearly half of South Africa’s population gets some form of welfare payment, and implementing a basic income grant, which would be the biggest of its kind globally, will probably drive emigration, according to a study by the research group Intellidex.
The statistics office stopped collecting data on self-declared emigrants in 2004.
South African Revenue Service Commissioner Edward Kieswetter said earlier this week the narrative around emigration is “overstated” and about 6,000 people left the country’s tax base last year.
While studies show South Africa’s income disparity would make it a good candidate for a wealth tax, authorities are currently not considering the measure and believe growing compliance would reduce the need for additional levies, he said.
Finance Minister Enoch Godongwana is scheduled to present a budget that outlines tax and welfare proposals on Feb. 22.