South Africa could reduce its effective tax rate from 25% to 16% were it not for BEE

If South Africa had never implemented black economic empowerment (BEE), the economy would have been significantly larger, allowing the effective tax rate to be reduced by nine percentage points.

This is one of the key conclusions that can be drawn from the report by the Free Market Foundation (FMF) and the Solidarity Research Institute on BEE.

The report, titled ‘The Costs of BEE Compliance’, showed that over nearly two decades, the cumulative drag on growth amounts to more than R5 trillion in lost economic activity.

Theuns du Buisson, an economics researcher at the Solidarity Research Institute, explained that, without BEE, South Africa’s GDP would have grown by an extra 3% annually.

The additional 3% would have increased South Africa’s GDP to R12.3 trillion, approximately R5 trillion more than its current value.

The higher GDP means that at the current effective tax rate of 25.2%, South Africa would have collected R3.1 trillion in tax revenue instead of the current R1.95 trillion.

This means that the effective tax rate in South Africa could have been 15.9% to generate the same level of tax revenue we have today.

Put differently, a flat tax rate of 15.9% would result in the government receiving the same amount of money as it currently does with an effective tax rate of 25.2%.

As South Africa has a large budget deficit, primarily due to its significant debt burden, the effective tax rate would need to be higher to achieve a balanced budget.

Du Buisson explained that if BEE were never implemented, South Africa would have been able to balance its current budget at an effective tax rate of 21%.

This means that even with the current excessive government spending, a balanced budget would have been possible with a flat tax rate of 21%.

BEE premiums on government services

Lost economic growth is only part of the story. The Institute of Race Relations (IRR) highlighted that the government pays significantly more for goods and services due to BEE.

It stated that public procurement allows for BEE preference premiums, which are capped at 25% on contracts below R50 million and 11.1% on contracts above R50 million.

“These preference premiums increase the cost of delivering public services and reduce value for money,” it said.

Despite the adverse effects of BEE, the National Treasury is committed to paying premiums and even tabled legislation to allow for their expansion in 2024.

IRR Legal Executive Director, Gabriel Crouse, estimated that the cost of BEE premiums in public procurement is approximately R17 billion per annum.

The IRR further estimated that waste due to corruption associated with the premium procurement system amounts to approximately R133 billion per annum.

By comparison, the International Monetary Fund (IMF), based on an earlier internal Treasury review, has estimated avoidable waste to be in the region of R270 billion per annum.

The IMF report noted that South Africa’s preferential procurement system through BEE is costly and ineffective.

The Zondo Commission reports have illustrated how the preferential procurement system has been exploited as an avenue for corruption, state capture, and rent-seeking.

Should the BEE premiums and associated wastage due to corruption and rent-seeking be eliminated, South Africa’s tax rate could be even lower.