Thought Leadership

BLSA’s CEO’s Weekly Newsletter – The GNU is SA’s chance to deal with its growth challenges

21/07/2024 | By Busiswe Mavuso

I was struck by research released last week that showed there are limits to how much revenue South Africa can raise by increasing taxes. The research examined the impact of the increase of the top marginal tax rate from 41% to 45% in 2017. It found that instead of raising the revenue that might be expected from the mathematics alone, it fell far short. This was likely because taxpayers responded to the increase by finding ways to circumvent it. Many reduced earnings, and perhaps most concerning there was a drop in output by firms that employ those in the top tax bracket. Other factors that could have played a role include emigration and tax evasion.

The analysis by the United Nations University’s World Institute for Development Economics Research (UNU-WIDER) found that rather than the R5.5bn of extra revenue that should have accrued from the mathematics of the increase, there was actually a R6.5bn reduction in total personal income tax revenue collected. So, an increase in the tax rate led to a fall in the tax revenue being collected.

We have made the point often enough that you cannot raise revenue simply by increasing taxes, but you can inflict significant economic damage. This point has been important in debates about how feasible it is to fund major new social programmes through higher taxes. The proposed National Health Insurance scheme is one example, the funding of which remains an unresolved issue. Conservative estimates put the cost of the scheme at over R200bn if it provides relatively minimal benefits and much higher for more comprehensive cover. Given the state currently expects to raise almost R2tn in total taxes this year, it would require a 10% increase in the revenue raised. Similar considerations apply to proposals for a basic income grant which could cost R300bn depending on the amounts available.

When considering how to raise more revenue from taxes, the key is the relationship between tax rates and tax revenue. A 10% increase in tax rates will not raise 10% more revenue. In fact, the UNU- WIDER paper shows it may have a net negative impact, actually reducing the total tax that can be raised. No doubt other forms of tax could behave differently – consumption taxes like VAT will be difficult to avoid and probably raise revenue, but income taxes like personal income tax or taxes on company profits will not.

Perhaps the most concerning finding of the paper is that companies that employ top-bracket earners reduced sales after the increase. The authors say this is consistent with reduced efforts by top earners after the tax hike. This is obviously negative for GDP overall. This finding should be taken as a clear indication that we cannot deliver expensive social programmes without a dramatically negative impact on the economy.

The only sure way to increase revenue is to increase economic growth, an objective shared by government and business and one we are working together to achieve. With economic growth comes tax revenue that can be used to deliver social services.

The GNU continues to make the right signals in this regard. I have written before about the risks to the SA economy from a deterioration of our relationship with the United States. Following the diplomatic gaffes we’ve made over relations with Russia in the last two years, including the Lady R debacle and joint military drills, US politicians have been understandably concerned. So much so that they introduced a bill in Congress to undertake a full review of the SA/US relationship. That bill was passed earlier this month by the House of Representatives, though it must still get through the Senate to become law. I was pleased to hear DTIC minister Parks Tau say he would lead a delegation later this month to the US for a summit on the African Growth and Opportunity Act.

This is an opportunity to start rebuilding the relationship. The new government of national unity can strike a quite different note in our international relationships compared to the previous administration. We need to maintain positive trading relationships with markets in the West at the same time as trade grows with the East. The nature of the trade differs markedly between the two, with markets like the US and Europe consuming far more value-added products like vehicles and services, while our trade with the East is dominated by the export of raw materials and import of manufactured goods. Trade with the West therefore supports much deeper supply chains in SA and more employment.

It is these kinds of steps that build confidence demonstrating that the GNU can make progress in dealing with our growth challenges. It is the one clear way we can provide a better life for all as it creates employment and tax revenue. We in organised business are eager to bring our skills and resources to the partnership with government so that we can jointly deliver that.

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BLSA is a business organisation that believes in South Africa’s future and shares the values set out in the Constitution. BLSA is committed to playing its part in creating a South Africa of increasing prosperity for all by harnessing the resources and capabilities of business in partnership with government and civil society to deliver economic growth, transformation and inclusion.