2% VAT Hike Debate
The recent debate surrounding a proposed 2% VAT hike has sparked widespread concern, with many questioning whether South Africans are already overburdened by high taxes. While Treasury initially attempted to justify the increase, it ultimately scrapped the idea, acknowledging that personal and corporate tax rates are already too high compared to similar economies. But even without this hike, South African taxpayers—especially middle- and high-income earners—are feeling the squeeze.
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South Africa’s Tax Burden: How High Is It?
South Africans are one of the most heavily taxed populations in the world, with tax revenue making up over 25% of the country’s GDP. While Treasury tried to argue that the VAT rate remains lower than in some peer countries, it failed to mention that those nations—such as India and Mexico—have much lower personal income tax rates.
Currently, the top marginal tax rate for individuals in South Africa is 45%, one of the highest among developing nations. This rate applies to individuals earning over R1.8 million per year, which is significantly lower than in countries like the UK, where the highest tax bracket applies only to those earning around R3 million annually.
The Hidden Tax Squeeze
Over the years, the government has introduced multiple tax policies that have quietly increased the tax burden on South Africans, including:
- Bracket creep: Tax thresholds have not been adjusted for inflation, meaning that salary increases push many taxpayers into higher tax brackets. This move raised R16 billion in extra tax revenue last year.
- Medical aid tax credit freeze: Not adjusting this credit brought in an extra R1.9 billion for the government.
- Wealth taxes: South Africans already pay a variety of wealth-related taxes, including estate duty, donations tax, capital gains tax, and transfer duty.
- Luxury taxes: Excise duties on items like cars, alcohol, and tobacco have increased above inflation.
- Dividend withholding tax: This tax was introduced at 10% in 2012 and later increased to 20%, which is high compared to international standards.
- Property transfer duty: At 13%, South Africa’s rate is among the highest globally.
These “stealth” taxes disproportionately impact the small percentage of income earners who contribute the majority of personal tax revenue.
Who Pays the Most Tax in SA?
South Africa’s tax base is incredibly narrow, with only 570,000 taxpayers (5% of the adult population) earning more than R1 million annually. Yet, this small group contributes 80% of total personal income tax revenue.
Even more alarming: 230,000 taxpayers earning over R1.5 million contribute 33% of total personal tax revenue. This places a heavy burden on a small number of earners while the majority of the population remains outside the tax net.
2% VAT Hike vs. Other Tax Increases
In theory, VAT is considered a less harmful tax increase compared to personal or corporate tax hikes. A 2018 Davis Tax Committee study found that raising VAT from 14% to 17% would have been less damaging to the economy than a six-percentage-point increase in personal income tax. Additionally, VAT is more difficult to evade compared to income tax.
However, VAT hikes also drive up inflation, which hurts low- and middle-income households the most. South African Reserve Bank (SARB) Governor Lesetja Kganyago warned that the proposed VAT hike would have been treated as an economic shock, potentially delaying interest rate cuts.
Is There an Alternative to Tax Hikes?
Rather than raising taxes, SARS Commissioner Edward Kieswetter has argued that improving tax collection efficiency could bring in an estimated R700 billion to R800 billion in missing tax revenue. This money is not being paid by individuals and businesses who should be contributing.
While much of this gap exists in the informal sector, some experts remain skeptical about whether cracking down on small businesses would actually yield the expected tax revenue. A better solution, they argue, is fostering economic growth—which would expand the tax base naturally by creating more jobs and increasing the number of taxpayers.
A Tax System Under Pressure
South Africa’s tax system is under immense strain. High personal and corporate tax rates, numerous hidden taxes, and bracket creep have already pushed taxpayers to their limits. While a VAT hike may have been politically easier to implement, it would have added to inflation and further strained struggling households.
The real issue is that too much of the tax burden falls on too few people. Until the government expands the tax base and improves tax collection efficiency, South Africa will continue to face tax policy debates—and taxpayers will continue to feel the squeeze.
