Yesterday, I wrote about South African Income Tax, and how South Africa is reliant on 13% of the population to pay income tax, and more specifically, how South Africa actually relies on about 1.5% of the population to pay almost two thirds of all income taxes.
Almost immediately, I had people pointing out that there are more than just income taxes in the budget.
Yes, I know – but I can only write one post at a time! So this is a follow-up.
All The South African Taxes
Based on the initial 2015 projections, here is how the South African government planned on collecting its R993 billion in 2015 tax revenues:
So at first glance, it seems that I’ve “over-stated” the impact of just how much tax is paid by the 13%.
- Company Taxes and Dividend Taxes are taxes on shareholders. Those shareholders…tend to be people that already pay income tax. And they’re almost entirely the people in the top decile.
- The same goes for Property and Estate taxes. Those are paid by the wealthy (you have to be worth more than R3.5 million on your death before you become liable for estate duty, or you have to be buying a home for more than R750,000 before you become liable for even the first cent of transfer duty).
- Customs and Import Duties are mostly passed on to customers through higher prices. And (I guess) those would be distributed similar to any VAT distribution, because it’s an indirect tax on spending…
- That leaves us with VAT, the Fuel Levy, and Excise duties. That is: the indirect taxes.
The Davis Commission, in their reports, have looked at the progressiveness of the VAT system (here’s a draft of their report). And the commission drew their conclusions from this World Bank working paper that was released earlier in the year: The Distributional Impact of Fiscal Policy in South Africa.
The Issue of Indirect Taxes
So the important question is: do the lower classes spend proportionally more of their incomes on indirect taxes than the upper classes?
And the answer (at least according to the World Bank) is: “Not on VAT or the Fuel Levy.”
So that’s a Lorenz curve. And a quick note on how to read that:
- The big black diagonal line at a 45º angle is the starting point: which is what the graph would look like if everyone paid the same amount of tax. Think of this as the line for a concert ticket, where it doesn’t matter what your income is, the price is the same for everyone (eg. “tickets are R100”, etc). The other way to think about it is: “what the graph would look like if everyone earned the exact same amount of income” – because then a tax rate applied would result in equal taxes paid by everyone.
- The orange “Disposable Income” curve shows the fact that everyone does not earn the same amount of money: the people in the lower deciles earn less than the people in the upper deciles. So this is the curve for proportionate share of income. The other way to think about this is: “what a tax graph would look like if everyone paid the same proportion of their income in tax“.
- What that means:
- Any tax curve that lies on the “disposable income” curve means that you’re looking at a tax which everyone pays in direct proportion to their income level: so whether you earn R2000 or R200,000, you’re spending a constant percentage of that income on the tax (10%, or whatever).
- Any tax curve that lies between the “disposable income” line and the diagonal line is a regressive tax: in which the poor spend proportionally more of their income on that tax than the rich.
- And tax curve that lies outside the “disposable income” line is a progressive tax: in which the rich spend proportionally more of their income on the tax than the poor.
So going back to the graph, two things:
- VAT and the Fuel Levy are tax neutral, in that everyone pays a similar percentage of their income toward the tax.
- The Excise Tax is regressive, in that the poor pay more relative to their income. Just to be clear: it does not mean that the poor “pay most of this tax”. To illustrate:
- Take two people: person A earns R2,000, and person B earns R200,000.
- Person A buys a beer, and there is a R2 excise duty on that beer that he ends up paying.
- Person B buys a bottle of Moet, and there is a R150 excise duty on that bottle of champers.
- Person B paid R148 more tax in absolute terms.
- But in relative terms, Person A paid 0.1% of his income, while Person B paid 0.075% if his income.
To quote the World Bank report:
This is the result of the fact that the poor consume proportionately more of the so-called sin goods.
So what we’re left with:
- 58% of the taxes collected are progressive.
- 39% of the taxes collected are mostly tax neutral.
- 3% of the taxes collected are regressive.
So taking all the World Bank Estimates on direct and indirect taxes together, what we find is this split in the tax bill:
To do some addition there:
- The top 10% contribute 71% of the total tax bill.
- The top 20% contribute 85% of the total tax bill.
- The top 30% contribute 91% of the total tax bill.
But then let’s compare this to the total direct transfers that get on-distributed:
What I’m trying to say is: when we talk about “taxes on the poor”, are they really “taxes”, or are they more like reductions in the total direct transfers received?
Because administratively speaking, it’s often easier to impose a lucrative tax that is regressive (like the “sin” taxes), and then compensate for that regressiveness with higher direct transfers, than it is to try and design the tax to be progressive from the outset.
Unfortunately, you can’t really differentiate between “direct transfers that are there to compensate for regressive taxes” and “direct transfers that are there to re-distribute wealth”. There’s not really too much data for that.
But either way, when you get down to the re-distributional impact, the net outcome is one in which most of the population receive more than they pay, and the main taxpayers pay a lot more than they receive:
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