System is designed to tackle inequality but falls short

SOUTH Africa’s personal income tax system is in the spotlight as the country’s tax filing season gets under way. Personal income tax is an important way of redistributing income from higher-earning to less-well-off individuals.

- NADINE RIEDEL AND IDA ZINKE

But how effectively does it do this and what can get in the way?

At the heart of any redistributive tax system is its structure — which incomes are taxed or exempted, which expenses are tax deductible, how the tax rate schedule is designed, and which tax credits are granted, including how much they reduce the tax owed.

The schedule translates taxable income into the taxpayers' tax liability by defining tax rates by tax brackets. The top tax rate is 45%.

In a recent study, we explore how features such as tax rates, deductions, credits and bracket adjustments shape the redistributive capacity of South Africa’s personal income tax system.

For this research, we analyse all the income tax returns of South African taxpayers provided by South Africa's Revenue Service for the tax years 2015 and 2018. (All records were made anonymous.)

The country’s personal income tax operates under a progressive tax scheme. People pay higher rates of tax as their income rises. Those with lower incomes may owe no income tax at all, while top earners can face marginal rates as high as 45%.

Based on our analysis, this progressive rate schedule is the most effective mechanism for redistributing income from higherto lower-income earners. By contrast, “tax expenditures” — that is, expenses, which taxpayers can deduct from what they owe in tax — lower the redistributive impact of the personal income tax system.

Our research shows that the benefits from tax expenditures in the country’s personal income tax system lower its ability to narrow income gaps. South African taxpayers can deduct various expenses from the personal income tax base and their tax liability respectively, including expenses for donations, home offices, certain insurance contributions and public offices.