Dawie Roodt warns South Africa has gone too far with taxes

South Africa is over the Laffer Curve with regard to its personal income tax (PIT) and corporate income tax (CIT), with a tiny number of taxpayers footing the majority of the bill. 

This means that increases to these tax rates are likely to result in less revenue as individuals and companies look to minimise their tax burden. 

Increased tax rates are also likely to result in further reductions in investment, limiting growth, and, thus, state revenue in future. 

This is feedback from Dawie Roodt, the chief economist at the Efficient Group, who outlined his assessment of South Africa’s position on the Laffer Curve for Daily Investor. 

Roodt said that South African taxpayers are among the most heavily burdened in the world, with a tiny fraction responsible for the majority of tax revenue. 

He also explained that the system is immensely complicated, making it difficult to administer and very costly to run. 

However, the main issue facing the tax system currently is South Africa’s narrow tax base, with a small number of individuals and companies being squeezed to fund the government’s operations. 

For example, only 2.6% of South Africans pay over two-thirds of the income tax in the country. In absolute terms, 1.6 million individuals pay 76.2% of the R2.2 trillion in PIT collections. 

This also extends to companies, with 1,051 companies paying 72.3% of all CIT in South Africa. In other words, companies with taxable income greater than R100 million constituted 0.1% of the total number but contributed 72.2% of taxable income and 72.3% of assessed tax. 

Almost 96.7% of all assessed companies with positive taxable income, from R1 to R10 million, paid only 11.3% of the tax assessed in 2024.

Roodt said this is evidence of the country being over the Laffer Curve concerning these two taxes, with any increase likely to result in a decline in revenue. 

Conversely, a reduction in these tax rates will most likely boost tax revenue through faster economic growth created by increased investment. 

This is based on an understanding of the Laffer Curve, developed by economist Arthur Laffer in 1974. The Laffer curve shows the relationship between tax rates and total tax revenue.

It states that total tax revenue is most likely not maximised when tax rates are at 100% because this disincentivises workers from earning wages.

A similar phenomenon occurs with companies, where higher tax rates discourage investment and growth, which would otherwise generate additional revenue. 

Alternatives to PIT and CIT

While Roodt said that South Africa is over the Laffer Curve with regards to PIT and CIT, it still has room to increase VAT. 

This is because VAT is inherently a broad-based tax, with everyone paying it, giving the state more room to increase it. 

Furthermore, South Africa’s VAT rate is relatively low compared to other emerging markets and developed economies. 

The Organisation for Economic Co-operation and Development (OECD) recently outlined reasons why the South African government should increase VAT to generate additional revenue for the state. 

South Africa’s revenue collection has weakened significantly due to sluggish economic growth and the hollowing out of SARS during the era of State Capture. 

This is not due to a lack of tax increases, as personal income tax rate increases and VAT rates between 2016 and 2020 had a limited effect on revenue collection. 

These increases have not resulted in significant changes in South Africa’s tax-to-GDP ratio, which currently stands at 24.5%. This is higher than most emerging economies but lower than the OECD average. 

The organisation said that various tax provisions and exemptions lower effective tax rates below statutory levels, suggesting revenue gains through policy streamlining. 

Personal income tax remains the largest source of revenue for the government, contributing 37.3% of total collections.

“Evidence suggests that raising the top marginal tax rate would have a limited impact due to Laffer curve effects,” the organisation said.

The value-added tax, the second-largest revenue source, contributed 35.4% of total tax revenues in the 2024 financial year, but remains below the OECD average.

This suggests there is room to increase both the tax rate and its base while alleviating the impact on the most vulnerable, the OECD said. 

To maximise the impact of any increase in the VAT rate, it is key to adopt complementary reforms to enhance collection. Otherwise, there would be a risk that revenue gains may fall short of expectations. 

Potential measures include enhanced registration, mandatory e-filing and the introduction of electronic invoicing, which has proven to be very effective in other OECD countries.

This must be coupled with the continued strengthening of tax administration capacities to tackle illicit trade and improve compliance. 

Furthermore, a list of zero-rated VAT items has also been defined to offset the impact on the most vulnerable. 

However, means-tested household support could achieve similar objectives with lower revenue costs, the OECD said.