South Africa’s Tax Base at Breaking Point: Economists Warn Against Further Tax Hikes in 2025 Budget

As South Africa’s government scrambles to find additional revenue to fund the 2025 budget, economists are sounding the alarm: further tax hikes could push the country’s already strained tax base to its breaking point. With just 1.5% of the population contributing 60.9% of personal income tax, the burden on high-income earners is immense. Any move to increase taxes risks falling foul of the Laffer Curve, a economic theory that warns of diminishing returns when tax rates are raised beyond a certain threshold.

The Laffer Curve and South Africa’s Tax Base

The Laffer Curve, proposed by economist Arthur Laffer, illustrates the relationship between tax rates and government revenue. It suggests that there is an optimal tax rate that maximizes revenue without discouraging productivity, investment, and economic growth. Beyond this point, higher taxes can disincentivize work and entrepreneurship, ultimately shrinking the tax base.

In South Africa, the tax base is already narrow and heavily burdened. According to the shelved 2025 budget review, just under 980,000 individuals—1.5% of the population—pay 60.9% of all personal income tax. Narrowing it down further, around 235,000 people contribute a third of all income tax.

Frederick Mitchell, Chief Economist at Aluma Capital, warns that any attempt to extract more from this small group could backfire. “Raising taxes risks reducing disposable household incomes, decreasing consumer spending, and stalling economic recovery,” he said.

The Political Battle Over the Budget

The Government of National Unity (GNU) faces a tough balancing act as it prepares for the 2025 budget, set to be announced on March 12. The African National Congress (ANC) is reluctant to cut spending, while the Democratic Alliance (DA) opposes further tax hikes. A compromise will need to be reached, but the stakes are high.

“The ANC does not want to cut spending, and the DA does not want another increase in taxes, but a compromise will have to be found somewhere before the 12th of March,” Mitchell noted.

The Risks of Raising VAT

One potential target for revenue generation is Value Added Tax (VAT). However, economists caution that raising VAT could further strain households and businesses already grappling with high living costs. Finance Minister Enoch Godongwana has acknowledged that trade-offs will be necessary, but the question remains: where will the additional revenue come from?

Mitchell emphasizes that an additional tax burden could have long-term consequences, including reduced consumer spending, lower investment, and a weaker economic recovery.

Alternatives to Tax Hikes

Instead of raising taxes, economists suggest alternative strategies to address the budget shortfall:

1. Improve Tax Collection: Investing in efficient and effective tax collection could boost revenue without increasing tax rates.
2. Cut Wasteful Spending: Eliminating wasteful and fruitless expenditures, as well as tackling corruption, could free up resources for essential services.
3. Support Economic Growth: Creating an environment conducive to business development and job creation can expand the tax base over time.
4. Sell Underutilized Assets: The DA has proposed selling underutilized state-owned land to generate revenue.

The DA’s Proposed Solutions

The DA, firmly opposed to tax hikes, has outlined its own plan to address the budget crisis. Key proposals include:

• Cutting excessive spending on non-core expenses.
• Implementing a 12-month hiring freeze on non-essential government positions.
• Reprioritizing budget allocations to benefit essential services.
• Conducting an emergency spending review to identify and eliminate waste.
• Boosting tax compliance to ensure all owed taxes are collected.

As South Africa approaches the 2025 budget, the government faces a critical decision: raise taxes and risk pushing the tax base to its limit, or find alternative solutions to balance the budget. Economists warn that further tax hikes could have severe consequences for economic recovery and long-term growth.

By focusing on efficient tax collection, cutting wasteful spending, and fostering economic growth, South Africa can address its fiscal challenges without overburdening its taxpayers. The path forward requires careful planning, political compromise, and a commitment to sustainable economic policies.

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