The Organization for Economic Co-operation and Development (OECD) has recommended banning South Africa’s small tax base under certain deductions to address inequality in the country and broaden the tax base.

The OECD is an intergovernmental organization with 38 member countries that conducts research on the financial systems and performance of specific countries in order to make recommendations for their improvement.

The OECD’s latest Economic Survey of South Africa 2022 added that the country’s progressive personal income tax schedule is marred by deductions that heavily benefit high earners.

“In general, tax rates are already high or comparable to OECD levels, but there are a wide range of tax provisions and exemptions that reduce effective tax rates well below statutory tax rates.”

The OECD said that although bonuses, overtime and other payments to employees are covered by personal income tax, there is a disadvantage that a significant proportion of realized capital gains are not included in the taxable base.

A point of contention for the organization is that tax credits and deductions such as travel, stock options and medical benefits paid on behalf of the employee undermine the progressivity of the tax system because higher income earners end up facing lower effective tax rates than middle income earners.

The OECD added that tax credits and deductions in the current tax system limit the power of actual tax collected. Even with high tax rates for the wealthy, after-tax incomes remain high as a result of the skewed distribution of income in the market.

It adds that dividends and the first 23,800 rand of local interest should be treated as personal income tax.

The OECD recommended that broadening South Africa’s personal income tax base would increase progressivity.

Personal income taxes are the most important source of revenue; however, the tax base for individuals is narrow. In 2020, the number of taxpayers was 5.2 million, compared to 11.3 million in the formal sector, according to the OECD.

“As the top marginal rate has been increased from 41% to 45%, options for broadening the tax base from the bottom could be considered as an integral part of the reform that broadens the tax base for higher income earners.”

The OECD added that there could also be a small reduction in the minimum income tax threshold to include some people earning between the minimum wage and the current income tax threshold.

Almost half of workers earn near the national minimum wage, while a small minority enjoy very high incomes. This profile of income distribution makes it difficult to set a personal income tax rate that significantly reduces income inequality without resorting to very high marginal tax rates.

South Africa’s personal income tax reform must strike a balance between reducing inequality and maintaining work incentives for middle- and high-income earners, the OECD said.

Wealth tax

To tackle inequality and fund South Africa’s basic income subsidy, industry leaders have hinted at introducing a wealth tax for high earners.

A move by the South African Revenue Service (SARS) to renew its focus on tax compliance by high net worth individuals and specific assets is likely to lay the groundwork for a wealth tax, according to investors and tax experts at PSG and Alan Gray.

Allan Gray tax manager Komil Gordhan said SARS’s requirement to declare assets at market value indicated that the taxman was trying to assess how much the value of those assets had increased and show where tax revenue opportunities could come from.

At a recent policy conference, the ruling ANC party revealed that key members of the ruling party continue to favor some form of wealth tax to fund the basic income subsidy.

The target should ideally be the richest 5% of people and estates with significant assets, said Mmamolaka Kubai, the party’s head of economic transformation.

The proposal, first floated at the ANC’s national conference in 2017, called for a properly structured wealth tax, possibly linked to a land tax, to promote equity and raise revenue.

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