The shrinking PIT tax base. What’s next?

Understanding the reasons behind SA’s shrinking tax base and what can be done to reverse the trend.
 

Executive summary

• The reasons behind SA’s shrinking tax base.
• Insights on importing skilled workers and bringing ex-pats home to reverse this trend.
• The role of economic reform on the PIT base.

Personal Income Tax (PIT) collection, the largest source of tax revenue in South Africa, has fallen in recent years.  Between 2003 and 2012, the number of PIT taxpayers grew by 7.0%. Since 2012, however, some of these gains have been eroded with a -2.1% decline in the number of taxpayers, according to data from SARS. This is particularly worrying as there were only 5.2 million individual taxpayers in 2020. These 5.2 million individuals, (representing approximately 9% of the population), contribute 40% of South Africa’s total tax revenue. Breaking it down further, about 20% of individual taxpayers contributed to three quarters of personal income tax revenue in 2020.

There are a couple reasons behind this trend. Firstly, the decline in PIT has been the result of the weak economy which has reduced the ability of firms to grow, increase salaries and hire people. The outlook for South Africa’s economy is expected to remain muted (GDP is expected to grow between 1.4% and 1.8% by 2023) and the unemployment rate has remained at untenable levels – so this trend is likely to persist. The other contributing factor to the decline in individual taxpayers is the emigration of skilled South Africans abroad. The UK, Australia and the Netherlands, for example, have all registered strong growth in the number of South African immigrants in recent years. 

So what can be done to turn this situation around?

The quickest intervention to boost the supply of individual taxpayers is to simply import more skilled workers. Visas for skilled foreign workers should be encouraged and expedited. Fast-tracking the employment of foreign workers will benefit the economy for several reasons: (i) it will ease an immediate constraint and will allow businesses to grow, (ii) skilled foreign workers will create jobs directly for other South Africans; and, perhaps most crucially, (iii) South Africans working with these individuals will learn global knowledge and best practices in their respective industries.

We also need to encourage South Africans based overseas to come home. When South Africans return, following the siren-call of family and culture, they bring with them knowledge, experience and access to global markets which can be leveraged to start and grow local businesses. Beyond the “softer” lifestyle aspects, we need to create a viable business case for South Africans to return and this can only be achieved through a growing and vibrant economy.

In the medium to long-term, a growing economy is the most significant factor when it comes to sustainably growing PIT collections.  The IMF, in its most recent Article IV consultation, has found that implementing the economic reform and fiscal consolidation agenda could result in South Africa’s GDP growth reaching 3.6% by 2025, compared with their baseline view of 1.4%. Consequently, this would reduce South Africa’s fiscal deficit from -8.3% of GDP in 2021 to -1.8% of GDP by 2025. There is no way getting around the difficult decisions and hard work needed to drive the economy forward.