When it comes to increasing tax revenue, it’s better to find ways of improving tax compliance, rather than raising taxes.

There is a paragraph in the 2022 Budget Review that reads, “an increase in annual expenditure of about R50 billion would require either a two percentage point increase in all the marginal personal income tax rates, which would decrease the tax-free threshold, or a two percentage point increase in VAT.”

This means if there are demands for the continuation of the Covid relief loan into 2023, higher wages for public servants, or more money for state utilities, then tax rates would need to increase.

However, there is another way: by making sure that everyone who is supposed to be paying tax, is actually paying their fair share.

Tax compliance can generate huge sums

In an interview with SARS Commissioner Edward Kieswetter, when asked whether improved tax compliance could yield the additional R50 billion mentioned in the Budget Review, his response was “Absolutely!”

There is something called a Tax Gap.  This is the figure that represents the under-collection of taxes due to non-compliance by taxpayers. This could be taxpayers not filing tax returns, not making payments, or actively evading tax.

The debate around what this figure is ranges from R100 bn a year to R300 bn a year, but as Kieswetter says “whatever the actual figure, it is definitely higher than R50 billion.”

Over the last three years SARS has been working to improve tax compliance, with many taxpayers experiencing increased scrutiny. The amount collected from personal income tax (excluding interest) has increased from R487 bn to R553.5 bn in this tax year, representing a 13.7 percent increase.

“Year-to-date we added 1.47 million registered taxpayers across all tax types,” says Kieswetter. He estimates that of the year-to-date taxes collected, R144 bn came from improved tax compliance.

SARS getting serious over non-compliance

SARS is reviewing all businesses that received payments from government over the past five years, and if non-compliant taxpayers are found, their cases are being handed over to the NPA for prosecution. Of  220 cases handed over to the NPA, there have been 113 convictions so far, of which 11 related to PPE contracts.

SARS has also been using lifestyle audits to identify non-compliance, especially around property.

“We look at the properties in the taxpayer’s name. We look at their liabilities. How did they pay for that property?”

In cases where the properties are clearly not holiday homes, SARS looks for rental income. Kieswetter says that this year SARS raised significant additional taxes by identifying non-disclosure of rental income.

Another option for raising more tax revenue is to “tax the rich”. According to the 2021 tax statistics, the number of taxpayers earning above R1.5 million is only 1.6% of the taxpayer base (120 751 people), so raising taxes at this level will not yield significant taxes.

A potential wealth tax, which was alluded to in the Budget Review, has never been particularly successful in other countries simply because people who have a lot of money have the means to hide their wealth or simply move to another country with more friendly tax regimes.

The Laffer Curve

When it comes to determining the optimal level of tax in a country, many economists refer to the Laffer Curve, which shows the relationship between tax rates and the amount of tax revenue collected.

There is a point on this curve where any additional tax will result in lower tax collection, as it will discourage taxed activities, like consumption and investment.

According to details published in the Budget Review, it appears that South Africa is possibly on the wrong side of the curve and that any additional tax increases would result in lower tax collection.

Since 2016 South Africa has increased taxes across several categories which affect wealthier individuals. These include increasing the maximum marginal tax rate from 41% to 45% and increasing dividends tax from 15% to 20%.

In 2016 the maximum tax rate for transfer duty increased to 13% for the value of property above R10 million. In April 2018 the VAT standard rate was increased from 14% to 15%.

According to National Treasury, many these tax increases failed to generate the revenue expected. “As tax increases multiply, they dampen economic growth, reduce investment, slow employment growth and negatively affect revenue-raising from other tax instruments by narrowing the tax base. Taxes inevitably distort economic actively as taxpayers change their behaviour.”

According to their figures, increasing the top tax rate from 41 to 45 percent for taxable incomes above R1.5 million in 2017 generated significantly less than the projected R4.4bn per year. In fact, the total real taxable income for those earning above R1.5 million decreased by nearly three percent, suggesting that people in this tax bracket changed their behaviour in order to reduce their tax liability.

The tax increases that yield the best outcomes are those that tax across the entire taxpayer base. The one percentage point increase in the personal income tax rate for most tax brackets in 2015/16 generated an additional R10 billion and the one percentage point VAT increase generated an additional R20bn.

If government urgently needs more money, it is not going to get it from the “rich”, but would be more tempted to simply increase taxes for everyone. The best way to avoid this is for tax compliance to increase. In the words of the SARS Commissioner “a well-functioning SARS removes the need to hike taxes.”

This article first appeared in City Press.