Taxing the rich at higher rates in South Africa?

Abstract

Long-run data on changes in the share of top income earners in
South Africa shows that the incomes of the top income groups have become less concentrated for most of the twentieth century, but have become more skewed in the last decade. Compared to a selection of developing and developed countries, the tax burden is already at a high level, which constrains further exploitation of the tax system for revenue purposes. The purpose of this study is to consider the implications of taxing the rich in South Africa more heavily to address large (taxable) income inequality. It is estimated that a 10 per cent increase in the top marginal tax rate would result in taxable income ranging from gains of approximately R2 billion to losses of R340 million. Although these results are tentative, they show that taxing the rich at higher rates may not produce the revenue windfall expected. The efficiency loss associated with an increase of one Rand in revenues is estimated at between R0.39 and R3.16. An alternative to taxing the rich at higher marginal tax rates could be reducing tax expenditures that are disproportionately utilised by the
rich and taxing the process whereby the rich become rich.

Key words: taxable income, taxing the rich, top income shares, inverted Pareto-Lorenz coefficients, elasticity of taxable income, marginal excess burden, tax expenditures