There is a view that SA is becoming an unsustainable proposition because emigration by the wealthy is causing the tax base to shrink. Meanwhile, the unemployed masses are increasingly turning to welfare, leaving the embattled middle class to shoulder an intolerable tax burden.
Some see these trends as a recipe for a revolution and believe it’s just a matter of time before SA becomes a failed state. While they’re not entirely wrong, the whole truth is more palatable. As long as SA avoids a basic income grant, I would go so far as to say that the tax base will be fine.
It took me six months to get inflation-adjusted tax base data going back five years from the SA Revenue Service (Sars), but it was well worth the wait. My conclusion based on a detailed analysis of the data (“The truth about our taxes”, Financial Mail September 22) is that while SA’s pay-as-you-earn (PAYE) tax base has not recovered fully from the hammering it took during Covid, it is growing.
The middle-income segment of the tax base is leading the way and shouldering a greater share of the tax burden, while the top end is losing a few thousand taxpayers a year. Strangely, the extent of financial emigration appears insignificant — for now.
On a five-year view the PAYE tax base has added only about 220,000 people. Five years ago it numbered 6.63-million people. It peaked at 7.22-million just before Covid, plummeted to 6.72-million during the pandemic but recovered some of that lost ground to total 6.85-million in the 2021/2022 tax year.
A total of 6,406 new individuals began paying personal income tax in 2021/2022. If the 18,458 new VAT vendors, 498 new trusts and 1,364 new corporations are included, a total of 44,575 new taxpayers were brought into the tax net. They contributed R4.7bn in additional tax revenue, of which R2.8bn was in the form of personal income tax.
In the same year 6,801 people obtained financial emigration clearance from Sars. So, roughly as many new taxpayers began paying personal income tax as emigrated (6,406 vs 6,801). But when the tax base is viewed holistically and new VAT vendors and corporates are included, the number of new entrants outnumbered those leaving six to one.
I didn’t expect to conclude that the tax system is doing just fine. I also thought the numbers emigrating would be far higher, though Sars’s data likely understates actual emigration significantly. I also didn’t expect to find that the state is relying more on a broad-based and growing pool of middle-income taxpayers — those earning between R20,000 and R72,000 a month.
Five years ago the 2.89-million people in these segments constituted 38% of the PAYE tax base and contributed 47% of PAYE. Last year they numbered 3-million people (40% of the PAYE tax base) and contributed almost 52% of PAYE. So, complaints from the middle class that their share of the tax burden is rising are valid, but the middle-income segments are also growing the fastest.
By contrast, the share of PAYE shouldered by the top 5% of taxpayers by income has dropped from 45% to 40% over the past five years. During this period this segment shed about 35,000 members (8% of its size) to number just under 400,000 individuals.
So, it is true that the fiscus relies on an exceptionally small pool of individuals — just 400,000 people make up the top 5% of taxpayers and provide 40% of all PAYE. It is also true that this pool has been eroded over time, which does indeed mean the state is relying on a shrinking pool of top-income individuals. However, it relies even more heavily on the 3-million taxpayers that shoulder 52% of PAYE and this pool is growing, though perhaps not fast enough.
Sars commissioner Edward Kieswetter says he’d be more concerned if the rate of personal income tax compliance wasn’t a mere 56% because this means there is significant scope to squeeze the existing tax base for more revenue. He estimates that Sars is owed R100bn more in personal income tax than is being collected and insists this is where SA should be focusing, not on raising a wealth tax or increasing the VAT rate.
Of course, the real solution is faster economic growth, because this would allow the tax base to grow faster organically without the need for new or higher taxes. But without faster growth, improving tax compliance is likely the most efficient way to improve SA’s fiscal integrity and ensure its long-term sustainability.
Either way, as long as Kieswetter’s in charge I will stop fretting about the health of SA’s tax base.
• Bisseker is a Financial Mail assistant editor.
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