South Africa increased taxes on rich people and then saw a sudden decline

The National Treasury revealed that previous tax rate increases for personal income tax did not raise the expected revenue as taxpayers changed their behaviour to avoid the tax.

It shared this information as part of the government’s response to the May 2025 parliamentary fiscal framework hearings.

The South African government requires additional revenue to balance its budget, which is why the National Treasury initially proposed a 2% increase in value-added tax (VAT).

However, widespread opposition to this increase, which was widely seen as detrimental to economic growth, forced the finance minister to reconsider this plan.

It raised the question of what other tax increases would be possible to raise additional revenue for the state.

Personal income tax (PIT) is a natural target, as it is the primary source of revenue for the state. It accounts for R793 billion of the R1.96 trillion in tax revenue.

In the 2025 Budget, there was no inflationary adjustment to tax brackets and rebates, which will help the state collect R15.5 billion in additional personal income tax (PIT) this year.

Some politicians advocated for higher taxes on the wealthy, including an increase in personal income tax for individuals earning more than R1.5 million per year.

However, the National Treasury highlighted that this would be counterproductive as higher income tax would not generate more revenue.

It explained that South Africa already has a high share of personal income tax as a percentage of gross domestic product (GDP) and a high top tax rate.

It added that South Africa’s high share of personal income tax as a percentage of GDP and the top tax rate are both much higher than those of other developing economies.

“Previous tax rate increases for PIT did not raise the expected revenue as taxpayers changed their behaviour to avoid the tax,” it said.

The National Treasury reported that the increase in the personal income tax rate to 45% for individuals earning over R1.5 million per year resulted in a 3.1% decrease in the taxable income in that bracket.

Simply put, after the government increased taxes on the wealthy, it received less money rather than more, as shown in the chart below.

The Laffer curve

Economist Dawie Roodt previously warned that there is no room to increase taxes as rich people and companies will leave the country or avoid paying taxes if it happens.

Roodt referred to the Laffer curve, which shows the relationship between tax rates and the amount of tax revenue governments collect.

The Laffer curve theory is built upon two extremes.

• If the tax rate is 0%, tax revenue would be 0.
• If the tax rate is 100%, no one will work, and the tax revenue would also be 0.

If the tax rate is incrementally decreased from 100% to 0%, the tax revenue will increase to an optimal point where tax revenue is maximised.

The government’s goal would be to reach the optimal tax rate to generate the highest tax revenue – the revenue-maximising point.

When the tax rate is raised beyond this point, individuals have greater incentives to do tax planning and arrange their finances in such a way as to pay as little tax as possible.

As the tax rate continues to increase, productivity would deteriorate as individuals would prefer to stay at lower tax brackets, as the reward for hard work would be too low to pursue.

Another problem is that rich people are mobile and may decide to leave a country or use other means to avoid paying the higher tax.

High taxes can also put a strain on the economy and limit growth, which in turn results in lower tax collections.