Reference: Published by Daily Investor, 20 June 2023

Tax warning in South Africa

The country cannot afford to raise taxes, according to economist Dawie Roodt, since wealthy individuals and businesses will flee if it does.

The Laffer curve, which depicts the correlation between tax rates and the total amount of tax income collected by governments, was mentioned by Roodt.

Two extremes form the foundation of the Laffer curve idea:

• Tax income would be zero if the tax rate were to be 0.
• Everyone would be unemployed and there would be no tax collection if the tax rate was 100%.

The tax revenue will rise to an ideal level where it is maximized if the tax rate is gradually reduced from 100% to 0%.

As the tax rate falls below what is necessary to properly raise tax revenue, it would eventually reach zero.

To maximize tax revenue, or the revenue maximising point, the government would aim to arrive at the ideal tax rate.

People are more motivated to engage in tax planning and set up their finances in order to pay the least amount of tax when the tax rate is raised above this threshold.

Productivity would decrease as the tax rate grew because people would opt to remain in lower tax bands because the payoff for working hard would be insufficient.

Another issue is that wealthy people are movable and can choose to leave a nation if taxes are too high.

High taxes may also hinder economic expansion and strain the economy, which lowers tax revenues.

The Laffer curve does not favor South Africa.

After tax collections fell short of expectations, South Africa will probably fall short of its primary budget surplus goal for the 2023 fiscal year by roughly R8.9 billion.

According to the National Treasury, the nation’s primary budget deficit for the fiscal year ending in March 2023 was R1.53 billion.

Slow economic development brought on by load-shedding, bad economic policies, and alignment with Russia makes the issue worse.

The government might think about increasing taxes to close the budget gap. It is difficult, though, as it may lead to even more serious issues.

According to Roodt, South Africa had passed the Laffer curve’s maximum point, making it challenging for the government to raise taxes.

According to him, raising income taxes may give the government a temporary boost in revenue, but it may also have unfavorable effects.

The majority of taxes in South Africa are paid by a tiny group of citizens. They are already leaving the nation and can do so with ease.

Higher income taxes will push wealthy people out of the country, according to Roodt, when coupled with the high crime rate and unstable economic climate.

The same issue as with personal income taxes may arise if we choose to increase corporate taxes as a second alternative.

Two-thirds of all business taxes are paid by just 770 companies, and they already pay some of the highest taxes in the world.

“We are unable to raise business taxes. Companies will simply relocate to another nation if you raise it any further, he claimed.

The government may also choose to raise the value-added tax (VAT). It will, however, upset the working class and unions, making it politically undesirable.

A greater gasoline fee, which is difficult to evade and simple to collect, is the ideal way to raise taxes, according to him.

Simply put, according to Roodt, “the state must spend less money and concentrate on fostering economic growth.”