The death last week of independent economist Mike Schussler, dubbed the “people’s economist” for his knack of delivering crisp, accessible economic insights, has saddened SA’s financial community.
As it happens, one of the last research pieces he wrote — an analysis of the fragility of SA’s middle-class taxpayer — which appeared in the April issue of Brenthurst Wealth’s investment report, is a subject that also concerns me a great deal.
Using a combination of World Bank, National Treasury and Stats SA data Schussler estimated that only about 18% of SA’s working-age population contributes towards personal income tax — one of the lowest shares in the world.
This is because so few adults work in SA (only 36% compared to the global average of 54.8%). Of those who do work, even fewer earn above the R91,250 a year threshold at which personal income tax becomes payable.
It is this small pool of individuals — 6.8-million at last count — that the government relies on for more than a third of all tax revenue. Last year this middle class pool contributed R556bn, making personal income tax by far the government’s largest money spinner.
In fact, SA’s annual personal income tax collections are equivalent to an astonishing 10.4% of its GDP. This places SA in 10th position globally, on a par with Norway and right behind Belgium (11.3%), Italy (10.9%) and Germany (10.6%). The number one spot is held by Denmark, where the personal income tax burden is equivalent to 24% of GDP.
“Basically, one of the world’s smallest middle classes pays the world’s tenth highest personal income tax (relative) to GDP,” Schussler exclaimed.
On top of this high tax burden many middle class households fork out thousands of rand each month for things such as private security, private medical aid cover and private education, given the poor quality of the public services that their tax revenue is supposed to finance.
“As a share of the adult population less than 20% are liable for personal income tax,” wrote Schussler. “I know of no other personal income taxpaying country where such a small share of the adult population pays the bulk of all tax income and receives so little in return.”
SA’s middle class had been under significant financial pressure over the past two years due to the hefty tax burden it must shoulder, combined with the rising cost of living and Covid-related job losses, noted Schussler. This is being worsened by the fuel and food price shock caused by the war in Ukraine, which is stoking inflation and accelerating interest rate hikes.
Schussler feared the middle class would not be able to carry the rising burden of higher taxes and government spending, which he anticipated was coming down the track. He warned that “any shocks to the small SA tax base would hurt government income and, therefore, all its social development agendas too. SA does not need higher taxes on a smaller middle class,” he wrote, “but lower taxes on a growing middle class, which will make SA more sustainable”.
But he had grave doubts as to whether the governing ANC has the political will to undertake the enabling reforms required to deliver the rapid growth and job creation needed to grow the tax base. “Without reforms, the middle class will soon be buried under ever more taxes that will make life in SA a lot harder for them, and many more will seek to leave in the next few years,” he warned.
Even so, he was hopeful that the risks posed would become a driving force for political change. “One does, however, wonder whether the politics of needed reforms or politics of the slogan will win the day,” he wrote. “This is the real question which we need answered.”
It is a tragedy that Schussler didn’t live to hear this question answered or to see how the story ends. But he was right to worry. SA’s position is not sustainable unless the tax base is growing.
• Bisseker is a Financial Mail assistant editor.
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