High tax burden has consequences

SA’s tax to GDP ratio is way above the average for Africa and may lead to a brain drain.

Goverment may turn to income from nationalisation and expropriation.

South Africa’s tax to GDP ratio increased dramatically from 2000 to 2015 and is way above the average for Africa and Latin America. But it’s not alone. A recent Organisation for Economic Cooperation and Development (OECD) study shows 75% of 80 countries surveyed have seen increases.

The level of taxes in an economy indicates the resources available to government to fund public services and infrastructure, but it’s also a rough estimate of the economy’s tax burden.

The OECD recently released its working document on taxto-GDP ratios in 80 countries in Africa, Asia, Latin America and the OECD from 1990 to 2015. The report found the average tax-to-GDP ratio in Africa increased by about five percentage points to 19.1% between 2000 and 2015.

In SA, it increased from 22.4% to 29%. The 2018 Budget Review shows a tax-to-GDP ratio of 25.9% in the 2017-18 fiscal year. In 2015, the average tax-to-GDP ratio was 23.1% in Latin America and 34% in the OECD. In Asia, Japan had the highest at 30% and Indonesia the lowest at 11.8%.

BDO’s Ferdie Schneider says although SA isn’t comparable with OECD countries, it’s pretty close to their 2015 average of 34%. The social infrastructure of OECD member countries is absent in SA. Comparing SA with another African country (average 19.1%) both offering little social security, one can argue South Africans are overtaxed.

Logan Wort of the African Tax Administration Forum was quoted recently as saying the region’s historically low tax-to-GDP ratios “limit the economic options on the table”.

He says Africa’s tax-to-GDP ratio increased from 15.6% in 2010 to 18.3% in 2017.

“However, this may not represent the full picture as Africa loses more money through illicit financial flows than it receives in aid.”

He believes it’s imperative for African revenue authorities to work together to ensure world tax rules consider the continent’s needs and inappropriate standards aren’t imposed. Authorities must also coordinate tax policies encouraging intraregional trade.

Schneider remarks that SA’s high tax-to-GDP ratio, compared to the level of social security offered to taxpayers, may be attributed to administrative incompetence, misappropriation and overspending of revenue, corruption and fraud. The dismantling of efficient structures within the SA Revenue Service (Sars) and a mass exodus of highly qualified, experienced people took a toll on tax morality and revenue collections.

SA should have a tax-to-GDP ratio closer to 23%, as it had in 1990 (23.9%) and 2000 (22.4%), says Schneider.

The consequences of overburdening taxpayers include a “brain drain from people wanting to get out of the tax oven”, tax avoidance and evasion. The real danger is that government must then look for alternative sources of income and nationalisation, expropriation without compensation and a shift to socialistic ideologies may be the only options.

Schneider says there have been positive trends since President Cyril Ramaphosa’s election, which may impact on the high tax-to-GDP ratio in future. Stateowned enterprises are being turned around. “If Sars can be turned around, collections will once again improve.”

If Sars can be turned around, collections will improve