A breakdown of the tax pie
Personal income tax has become more important as a source of government revenue in recent years. Stats SA’s latest publication provides a breakdown of the latest tax data from national government.
Personal income tax contributed over a third of the R1,22 trillion in taxes collected by national government in the 2017/18 fiscal year, according to Stats SA’s Financial statistics of national government report. The second biggest source of tax was value added tax (VAT), followed by company income tax.(1)
The tax mix looked starkly different a decade ago. In 2008/09, national government collected about the same amount of personal income and company income tax: contributions that year were 31% and 30% respectively.
The 2008–2009 global financial crisis, which resulted in South Africa’s first economic recession since 1994, was particularly hard on businesses. Revenue from company income tax declined in 2009/10, and since then has grown at a much slower rate than the amount collected from personal income tax.
Tax revenue has been increasing despite weak economic growth. The tax-to-GDP ratio, which gives a sense of the tax burden, shows tax revenue as a percentage of gross domestic product (GDP). In 2017/18, South Africa’s tax-to-GDP ratio was 25,9%.(1) The chart below shows how the tax-to-GDP ratio has grown since the late nineties, peaking at 26,4% in 2007/08.(2) The higher the percentage, the higher the amount of tax collected relative to the size of the economy.
South Africa finds itself in the list of top ten countries with the highest tax-to-GDP ratio, according to the International Monetary Fund’s (IMF) figures.(3) Of the 115 countries for which data are available, South Africa is ranked in 8th spot, just behind New Zealand and Sweden. Notably, our neighbours Namibia and Lesotho are higher up on the ladder in 2nd and 3rd places, just behind Denmark, the front runner.
South Africa finds itself ahead of other countries such as the United Kingdom (25,7%), Australia (22,2%), Brazil (12,7%) and the United States (11,9%). The world average, according to the IMF, was 15,4% in 2017.
Is having a high GDP-to-tax ratio a good or a bad thing? It depends on each country. For a nation that has a high ratio but where taxpayers are receiving good value for money, a high tax burden might not be that detrimental. Countries such as Denmark, Sweden and Norway have high tax-to-GDP ratios, but these nations report the highest standard of living.
A very low tax-to-GDP ratio can be problematic as it may be a sign of an inefficient tax system. A government will struggle to provide services, build infrastructure or maintain public goods if it fails to collect taxes during periods of strong economic growth. Indonesia, for example, has in recent years committed itself to raise its tax-to-GDP ratio from 10% to 15%.(4)
The tax-to-GDP ratio alone provides no indication of good governance, the efficiency of the taxation system in the country, nor the way in which taxes are used or distributed.
For more information, download the latest Financial statistics of national government release and accompanying Excel data here.
(1) That’s tax collected (R1,22 trillion) divided by the GDP in current prices (R4,69 trillion).
(2) The tax data prior to 2005/06 in the chart are courtesy of SARS and National Treasury. Source: South African Revenue Service (SARS) and National Treasury, 2018 Tax Statistics, Table 1.6 (see here). The chart has been updated with revised GDP figures from Stats SA.
(3) International Monetary Fund (IMF), Government Finance Statistics Yearbook and data files. The data are available from the World Bank data portal (access the data here).
(4) The Jakarta Post, Indonesia’s low tax-to-GDP ratio (read here).