Who bears the tax burden
By Kay Walsh, Economist, Strategy and Innovation Deloitte
Deloitte Budget 2012 Expectations
Johannesburg, 23 January 2012 - Personal income tax payers are often under impression that they bear a disproportionate share of the total tax burden and that this more so the case now, than in previous years.
While it is true that personal income tax (PIT) is the single largest contributor to the South African government’s total tax revenue, the relative contribution of PIT to overall tax revenue has declined significantly over the past decade. Between 2000 and 2007, this contribution to overall tax revenue decreased from 43.5 per cent to a low of 29.3 per cent in 2007. Over the same period, the contributions of the other major source of tax revenue, VAT and tax payable by companies, rose by 2 and 13.7 percentage points to a respective 25.6 & 28.7 percent.
The business cycle is a major driver of tax collections and so it is not surprising to find that the composition of tax revenue shifted greatly in the wake of the global financial crisis. Between 2007 and 2010, personal income taxpayers bore an increasing portion of the total tax burden, with their contribution peaking at 35.6 per cent of tax revenue in 2009\10. This, however, could be largely attributed to the significant slowdown in VAT and company tax collections as consumer spending slowed and the economy entered recession. The 2010\11 fiscal year saw a partial reversal in these trends; the contribution of PIT declined while that of VAT increased. . Companies, however, were footing even less of the bill in 2010\11, suggesting that firm profits continue to decline.
While PIT is likely to have remained the single largest contributor to total tax revenue in 2011\12, a continued albeit gradual improvement in economic conditions should have given rise to increased contributions from companies and VAT. Data collected by the U.S. Census Bureau, from 2000 to 2008 also reveals that the share of PIT in total tax revenue in South Africa is broadly in line with international averages. The share of PIT in total tax revenue across a sample of 7 developed economies ranged from 17.4 to 37.9 percent and averaged 29.8%.
On the basis of this analysis, claims by various commentators that PIT payers bear an increasing and disproportionate share of the tax burden appear largely unfounded. This however does not detract from a distinct but related argument that the PIT base in South Africa is currently too narrow and needs to be broadened. Of a total potential labour force of 17.7 million and employed population of 13.3 million, only 5.7 million currently pay personal income tax. There is however no easy answer to the question of how to broaden the tax base since great strides have already been made in increasing compliance and there is only limited room for further improvement on this front. Attempts to broaden the tax base will now depend on the extent to which we are able to bring more of the potential workforce into the realm of the employed. There are no ‘quick-fixes’ to address the problem of persistently high unemployment rates, rather we need to sustainably increase our potential economic growth rate by (amongst other things), investing in key enabling infrastructure and by taking bold steps to improve the quality of basic education.