VI A Comparative Analysis of the Tax System
  • 1 https://isni.org/isni/0000000404811396, International Monetary Fund
  • | 2 https://isni.org/isni/0000000404811396, International Monetary Fund

Abstract

Acritical issue confronting South African policymakers in the period ahead is the extent to which taxes might be raised to finance an increased level of social expenditure. The main purpose of this chapter is to provide a comparative analysis of South Africa’s tax system so that this issue can be addressed. The first part of the chapter describes the main elements of the existing tax system and provides an interracial breakdown of the tax burden. The remainder of the chapter compares the overall tax burden and the various tax rates in South Africa with those of the industrial and the middle-income countries.

Acritical issue confronting South African policymakers in the period ahead is the extent to which taxes might be raised to finance an increased level of social expenditure. The main purpose of this chapter is to provide a comparative analysis of South Africa’s tax system so that this issue can be addressed. The first part of the chapter describes the main elements of the existing tax system and provides an interracial breakdown of the tax burden. The remainder of the chapter compares the overall tax burden and the various tax rates in South Africa with those of the industrial and the middle-income countries.

The main conclusion that emerges from this analysis is that, overall, the South African tax burden and its marginal tax rates cannot be judged to be low by international standards. Moreover, insofar as the tax burden on the white community appears to be relatively high even by industrial country standards, raising tax rates in South Africa would be likely to raise disincentives to levels that are very high by international standards. However, revenue could be raised by improving the efficiency and equity of the tax system, in particular, by reducing tax expenditures—especially insofar as they encourage capital deepening—broadening the tax base, and changing the mix between direct and indirect taxes.

Aspects of the Tax System

At present, South Africa’s tax revenues derive mainly from four sources: the individual income tax, a general sales tax, the direct taxation of companies other than mines, and the taxation of the mines. The system also includes an estate tax and a variety of excise taxes, but includes neither wealth taxes nor capital gains taxes. Moreover, since March 1990, the double taxation of dividends has been eliminated.

As shown in Table 19, the composition of revenues changed markedly over the 1980s. In particular, as a proportion of total receipts, individual income tax collections and sales taxes posted strong increases, while mining taxes declined sharply. The drop in mining tax collections reflected low international prices—mainly for gold—rising wage costs, and declining ore grades. Nonmining corporate tax payments as a proportion of total revenues were roughly stable over the 1980s, but were a less important source of revenue than they had been in the previous decade. This development was largely due to the compression in corporate profits linked to the combination of the slow economic growth of the past decade and rising wage pressures, which acted to squeeze profit margins. Collections from “other taxes” dropped over the decade, from 24 percent of total collections to 7 percent, as the authorities relied primarily on the general sales tax rather than on the specific excise taxes to raise revenues.

Table 19.

Tax Revenue Breakdown by Tax Category

(In percent of total taxes)

article image
Sources: South African Department of Finance, Inland Revenue, Statistical Bulletin No. 6 (1988), and budget estimates.

The main features of the four principal taxes may be described as follows:

(1) The individual income tax on married persons is levied progressively on 15 income brackets starting at a 15 percent marginal rate for taxable income of less than R 5,000, and ending at 43 percent for incomes higher than R 80,000.33 The system provides for personal and old age tax credits of R 1,250 for married persons and R 850 for unmarried persons. Certain medical bills and pension contributions are tax exempt; however, mortgage interest payments may not be deducted from income taxes, although, since March 1991, the first R 2,000 of taxable interest income has been exempt as have dividends received by individuals from public corporations. A further feature of the income tax system is that income tax brackets are not indexed. This resulted in substantial bracket creep over the 1980s, which has led to a significant increase in income tax collections despite the progressive reduction in marginal tax rates.

(2) A general sales tax at the retail level at a flat rate of 13 percent is currently in effect but was replaced, effective September 30, 1991, by a uniform 10 percent value-added tax.34 Excluded from the general sales tax were exports, certain basic foods, professional services, and services that served as intermediate goods for production purposes. The main weaknesses of this tax were the administrative difficulties in preventing tax evasion and the distortionary effects to which it gave rise as a result of a certain degree of tax cascading. The value-added tax is intended to widen the tax base while at the same time reducing evasion and distortions. Exclusions under the value-added tax are much more limited than under the former sales tax.

(3) A company tax, applicable to all nonmining companies, is levied at a flat rate of 48 percent on taxable income. It is subject to numerous tax expenditures, as a result of which the South African Inland Revenue Service estimates that its effective rate is probably only about 40 percent. Among the more important of these tax expenditures are capital allowances at the rate of 50 percent, 30 percent, and 20 percent in the first, second, and third years, respectively, for assets purchased before December 1989, and a uniform 20 percent a year allowance for assets acquired after December 1989. Moreover, companies still receive tax exemptions for their manufactured exports, while building societies and other financial institutions receive preferential tax treatment. These tax preferences are to be phased out progressively in line with the recommendations of the Margo Report.35 The Government’s basic objective is to phase out remaining tax concessions so as to reduce the nominal rate of the company tax to an eventual 40 percent without losing revenue from this source.

(4) A special tax regime applies to the mining sector; its objectives include prolonging the life of the mines and promoting investment in the sector. As Table 20 shows, non-gold mines are currently subject to taxes and surcharges amounting to 54 percent, but, in line with the Margo Report, the surcharge element of these taxes is being progressively reduced.

Table 20.

Diamond and Other Mine Tax Rates and Surcharges

(In percent)

article image
Source: South African Department of Finance.

The gold mines are taxed according to a formula that varies the rate of tax in line with the relative profitability of the mine so as to encourage the mining of low-grade ores (see Table 21). Owing to concerns about the declining profitability of the mines, over the past two years the parameters of the formula have been revised with a view to reducing the tax burden on the mines.

Table 21.

Gold Mine Tax Rate Formula1

(In percent)

article image
Source: South African Department of Finance.

Symbols: Y represents the calculated tax rate; X represents the ratio of taxable income (excluding losses brought forward from previous years for tax purposes) to gross revenue.

A striking feature of the mine tax is the highly generous depreciation allowances it affords. Currently, 100 percent of most capital expenditures are deductible in the first year in which they are effected. These expenditures are generally “ring fenced” in that they can be set against the income emanating only from the particular mine to which they apply, but they can be carried forward to subsequent fiscal years if they are not used.

Interracial Distribution of Taxes

Official data on the distribution of taxes by racial groups are available only for direct tax payments. However, van der Berg (1989a), using McGrath’s survey data, has estimated the distribution of both taxes and social benefits along racial lines for 1975 (see Table 22). The staff has updated these estimates for 1987 using available budget data and the most recent estimates of the Inland Revenue on direct tax payments by racial category and making assumptions as to the distribution of the remaining taxes.36

Table 22.

Interracial Distribution of Taxes and Benefits

article image
Sources: South African Department of Finance; and IMF staff estimates.

The estimates in Table 22 indicate that, even though the composition of taxation underwent a marked change during the 1980s, the relative distribution of the tax burden by racial group has not changed dramatically. The introduction of the general sales tax did extend the revenue net to the nonwhite groups, but the impact on the relative tax burden was almost entirely offset by the substantial rise in income tax—a tax borne largely by whites37 —over the period. Thus, the share of taxes paid by whites is estimated to have only declined from 77 percent of the total in 1975 to 72 percent by 1987. Over the same period, there was a dramatic reduction in the share of total social benefits received by whites—from 56 percent of the total in 1975 to 35 percent in 1987—which stemmed from the marked redirection of the Government’s budget priorities and which more than offset the relative decline in the white sector tax burden during the 1980s.

Tax Burden by International Standards

To assess South Africa’s tax burden in relation to that of other countries, two sets of comparisons have been made (Tables 23 and 24). The first compares South Africa’s average tax burden by individual tax component during 1980–88 with that of both the industrial and the developing countries, while the second compares South Africa’s tax burden by racial grouping with that of a selected group of countries.

Table 23.

Tax Revenue by Type, Compared with Other Groups of Countries, Average for 1980–88

(In percent of GDP)

article image
Sources: IMF, Government Finance Statistics, and data compiled by the Tax Policy Division of the Fiscal Affairs Department.

The selected non-oil (except Mexico) middle-in come countries include, in order of per capita income, Mexico, Mauritius, Malaysia, Panama, Brazil, Uruguay, Argentina, Republic of Korea, Portugal, and Greece. The first five have a lower per capita income than South Africa and the last five a higher per capita income.

Mainly social security taxes, but also wealth or property taxes and royalties.

Includes social security taxes, wealth or property taxes, and royalties.

From Table 23, it would appear that, through the 1980s, South Africa’s overall tax share, at about 21¼ percent of GDP, was approximately in line with that of other middle-income countries.38 How-ever, the composition of taxation was very different. In South Africa, individual income tax and corporate income tax collections substantially exceeded those in the other middle-income countries. In contrast, other countries raised substantially more revenue through social security and wealth taxes than did South Africa.

Given the very uneven distribution of taxes between the different racial groups referred to above, it is perhaps more revealing to compare tax burdens and social spending benefits by racial group with those prevailing in other countries. As shown in Table 24, it appears that, at 32 percent of its respective income, the tax share of the white sector of South Africa is very high by the standards of other middle-income countries and at least comparable to that prevailing, on average, in the industrial countries. This comparison becomes all the more striking if one looks at a “net tax burden” concept, which nets out from the tax burden the various social benefits provided by the budget to the groups being compared. Thus, Table 24 indicates that, whereas the net tax burden on whites in South Africa is about 20 percent of their respective income, the corresponding ratio in the average industrial country would be about 10½ percent.39

Table 24.

Comparative Tax Burden

(In percent of GDP)

article image
Sources: IMF, Government Finance Statistics, and staff estimates.

Tax Rates by International Standards

An alternative, but perhaps more hazardous, way of comparing tax systems across countries is to look at tax rates rather than tax burdens. Table 25 summarizes various features of the individual and corporate income taxes in South Africa and in a number of industrial countries with which South Africa can be usefully compared. Taking the income and corporate taxes together, South Africa’s tax rates are not low even by the standards of the industrial countries.

Table 25.

Selected Countries—Statutory Tax Provisions

article image
Sources: South African Department of Finance; Vito Tanzi (1987); and Price Waterhouse (1990).

In relation to per capita income for whites. The figure would be on the order of 11.9 in relation to per capita income for the country as a whole.

Reduced to 48 percent in the 1991/92 budget.

Includes provincial rates.

Includes state and local taxes and social security payments. Social security taxes vary from 7.5 percent to up to 13 percent for the self-employed, while state taxes range up to 9.3 percent.

Table 25 shows that, at 50 percent in 1990, South Africa’s corporate income tax rate was among the highest in the industrial countries. However, its effective rate is reduced to a great extent by a variety of tax allowances and exemptions that tend to bring it more in line with those of the majority of the industrial countries.

As to the individual income tax rates, South Africa’s top marginal tax rate, at 43 percent in 1991, falls roughly in the middle of the range for the industrial countries, being comparable to the top rates in Australia, Canada, the United Kingdom, and the United States. In addition, the South African individual income tax system is characterized by many more income tax brackets than those prevailing elsewhere. However, the top individual income tax rates in South Africa appear to come into effect at a much higher multiple of per capita income than in the industrial countries as a whole.

33

For single persons, taxes are levied on 12 tax brackets, starting at 14 percent for taxable income under R 5,000 and ending at 43 percent for taxable income in excess of R 56,000.

34

For a fuller discussion of both the general sales tax and the value-added tax, see Ghandi, Shome, and Zee (1991).

35

Republic of South Africa, White Paper on the Report of the Commission of Inquiry into the Tax Structure of the Republic of South Africa (1988).

36

It was assumed that the general sales tax and the various excise taxes would be distributed in line with income distribution, while the incidence of corporate income taxes was assumed to fall mainly on the white sector, with about 28 percent of this tax assumed to be shifted forward into the nonwhite sector of the community.

37

Inland Revenue estimates indicate that the white share of total income tax payments declined from 93 percent in 1986 to 83 percent by 1989 as the number of nonwhites paying taxes increased.

38

The increase in South Africa’s tax burden to about 24 percent of GDP by the end of the period would place it about 2 percentage points of GDP above the average of other middle-income countries.

  • Abedian, I., and B. Standish,Poor Whites and the Role of the State: The Evidence,South African Journal of Economics, Vol. 53 (June 1985), pp. 14165.

    • Search Google Scholar
    • Export Citation
  • Bayoumi, TamimOutput, Employment and Financial Sanctions in South Africa,IMF Working Paper 90/113 (Washington: International Monetary Fund, December 1990).

    • Search Google Scholar
    • Export Citation
  • Boateng, E. Oti, and others,A Poverty Profile for Ghana, 1987–88,Social Dimensions of Adjustment in Sub-Saharan Africa, Working Paper No. 5 (Washington: World Bank, 1990).

    • Search Google Scholar
    • Export Citation
  • Coopers & Lybrand, International Tax Summaries: A Guide for Planning and Decisions, 1991 (New York: J. Wiley & Sons, 1991).

  • de Lange, A. Roukens and D. E. van Seventer,Implications and Implementation of Income Redistribution: An Investigation Based on Social Accounting Matrix,Second Carnegie Conference into Poverty and Development in Southern Africa, Post Conference Series No. 16 (Cape Town, 1986).

    • Search Google Scholar
    • Export Citation
  • Development Bank of Southern Africa, Annual Report (Pretoria), various issues.

  • Development Bank of Southern Africa, SATBVC Countries: Statistical Abstracts, 1989 (Sandton, South Africa: Halfway House, 1990).

  • Devereux, S.South African Income Distribution 1900–1980,Saldru Working Paper No. 51 (Cape Town: Southern Africa Labor and Development Research Unit, 1983).

    • Search Google Scholar
    • Export Citation
  • Eckert, J. B.Physical Quality of Life Indices for South Africa,Development Southern Africa, Vol. 3 (February 1986), pp. 619.

  • Economist Intelligence Unit (United Kingdom), Country Profile: South Africa, 1990–91, Annual Survey of Political and Economic Background (London, 1990).

    • Search Google Scholar
    • Export Citation
  • Gandhi, V. P., P. Shome and H. H. Zee, South Africa: Introduction of VAT—Structure, Price Effects, and Protecting the Poor (unpublished; Washington: International Monetary Fund, 1991).

    • Search Google Scholar
    • Export Citation
  • Hofmeyr, J.Black Wages: The Post-War Experience,” in The Political Economy of South Africa, ed. by Nicoli Nattrass and Elizabeth Ardington (Cape Town: Oxford University Press, 1990).

    • Search Google Scholar
    • Export Citation
  • Industrial Development Corporation of South Africa Limited, Modification of the Application of Protection Policy: Policy Document (Sandton, June 1990).

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund (1990a), Government Finance Statistics Yearbook (Washington, 1990).

  • International Monetary Fund (1990b), International Financial Statistics Year-book (Washington, 1990).

  • Iyengar, Murali, and Richard Porter,South Africa Without Apartheid: Estimates from General Equilibrium Simulations,Journal of International Development, Vol. 2 (January 1990), pp. 159.

    • Search Google Scholar
    • Export Citation
  • Knight, J., and M. McGrath,An Analysis of Racial Wage Discrimination in South Africa,Oxford Bulletin of Economics and Statistics, Vol. 39 (November 1977), pp. 24571.

    • Search Google Scholar
    • Export Citation
  • Knight, J.,The Erosion of Apartheid in the South African Labour Market: Measures and Mechanisms,Discussion Paper No. 35, Institute of Economics and Statistics (September 1987).

    • Search Google Scholar
    • Export Citation
  • Leape, Jonathan South Africa’s Foreign Debt and the Standstill, 1985–1990 (London: Center for the Study of the South African Economy and International Finance, London School of Economics, 1991).

    • Search Google Scholar
    • Export Citation
  • May, Julian,The Migrant Labour System: Changing Dynamics in Rural Survival,” in The Political Economy of South Africa, ed. by N. Nattrass and E. Ardington (Cape Town: Oxford University Press, 1990).

    • Search Google Scholar
    • Export Citation
  • McGrath, M.Economic Growth, Income Distribution and Social Change,” in The Political Economy of South Africa, ed. by N. Nattrass and E. Ardington (Cape Town: Oxford University Press, 1990).

    • Search Google Scholar
    • Export Citation
  • Nattrass, Nicoli, and Elizabeth Ardington, eds., The Political Economy of South Africa (Cape Town: Oxford University Press, 1990).

  • Nel, P. A., and H. de J. Van Wyk, Personal Income of the RSA and National States by Population Group and Magisterial District, 1960 to 1980 (Pretoria: Bureau of Market Research, University of South Africa, 1984).

    • Search Google Scholar
    • Export Citation
  • Porter, Richard C., A Model of the Southern African-Type Economy,American Economic Review, Vol. 68 (December 1978), pp. 74355.

    • Search Google Scholar
    • Export Citation
  • Price Waterhouse, Individual Taxes: A Worldwide Summary (New York, 1989).

  • Price Waterhouse (1990a), Corporate Taxes: A Worldwide Summary (New York, 1990).

  • Price Waterhouse (1990b), Doing Business in South Africa (New York, 1990).

  • Republic of South Africa, White Paper on the Report of the Commission of Inquiry into the Tax Structure of the Republic of South Africa (Margo Report) (Pretoria, 1988).

    • Search Google Scholar
    • Export Citation
  • Republic of South Africa, Central Statistical Services, South African Labor Statistics, 1991 (Pretoria, August 1991).

  • Republic of South Africa, Department of Finance, Inland Revenue, Statistical Bulletin No. 4 (Pretoria, 1986).

  • Republic of South Africa, Department of Finance, Inland Revenue, Statistical Bulletin No. 6 (Pretoria, 1988).

  • Republic of South Africa, Department of Finance, Budget 1991/1992 (Pretoria, 1991).

  • Republic of South Africa, Department of Information, Official Yearbook of the Republic of South Africa, 1989–90 (Pretoria, 1990).

  • Republic of South Africa (1991a), Department of National Education, Education in the RSA 1988 (Pretoria, 1991).

  • Republic of South Africa (1991b), Department of National Education, Education Realities in South Africa 1990 (Pretoria, 1991).

  • Republic of South Africa (1991c), Department of National Education, Education Renewal Strategy: Discussion Document (Pretoria, 1991).

  • Republic of South Africa, Department of National Health and Population Development, 1990 Health Trends in South Africa (Pretoria, 1991).

    • Search Google Scholar
    • Export Citation
  • Republic of South Africa, Inland Revenue Information Service, Taxation in South Africa, 1990 (Pretoria: Government Printer, 1990).

  • Research Institute for Education Planning, Education and Manpower Development, 1989 (Bloemfontein, 1990).

  • South African Reserve Bank, Quarterly Bulletin (Pretoria), various issues.

  • Tanzi, V., The Response of Other Industrial Countries to the U.S. Tax Reform Act,National Tax Journal, Vol. 40 (September 1987), pp. 33955.

    • Search Google Scholar
    • Export Citation
  • Technical Committee on Mining Taxation, Report of the Technical Committee on Mining Taxation (1988).

  • Terreblanche, S., and N. Nattrass,A Periodization of the Political Economy From 1910,” in The Political Economy of South Africa, ed. by N. Nattrass and E. Ardington (Cape Town: Oxford University Press, 1990).

    • Search Google Scholar
    • Export Citation
  • Trotter, G. J., Education and Income Distribution,South African Journal of Economics, Vol. 45 (December 1977), pp. 33561.

  • Trotter, G. J., Education and the Economy,” in The Political Economy of South Africa, ed. by N. Nattrass and E. Ardington (Cape Town: Oxford University Press, 1990).

    • Search Google Scholar
    • Export Citation
  • van der Berg, Servaas (1989a), “Long-Term Economic Trends and Development Prospects in South Africa,African Affairs, Vol. 88 (April 1989), pp. 187203.

    • Search Google Scholar
    • Export Citation
  • van der Berg, Servaas (1989b), “Meeting the Aspirations of South Africa’s Poor Through Market and Fiscal Processes,Paper delivered to the Colloquium on the Future South African Economy, Lausanne, July 1989 (Lausanne: Institut des hautes etudes en administration publiques).

    • Search Google Scholar
    • Export Citation
  • Wilson, Francis, and Mamphela Ramphele, Uprooting Poverty: The South African Challenge: Report for the Second Carnegie Inquiry into Poverty and Development in Southern Africa (Carnegie report) (New York: Norton, 1989, 1st American ed.).

    • Search Google Scholar
    • Export Citation
  • World Bank (1990a), The World Bank Atlas: Gross National Product, Population, and Growth Rates (Washington, 1990).

  • World Bank (1990b), World Development Report 1990 (New York: Oxford University Press, 1990).