Africa-Press – South-Africa. South Africa’s government has gone beyond the economy’s theoretical breaking point in regard to the tax burden it can carry, with the country too far along the Laffer Curve.
This means any increases to taxes in South Africa, particularly personal income tax (PIT) and corporate income tax (CIT), are likely to result in less revenue being collected, not more.
Such an outcome stems from it becoming increasingly worthwhile for wealthier individuals and profitable companies to invest in becoming more tax-efficient rather than growing their wealth or operations.
Elevated tax rates are also likely to lead to less investment in the local economy, slower growth, and less wealth creation, thereby reducing the income available for taxation.
This is feedback from Efficient Group chief economist Dawie Roodt, who explained that the National Treasury is still in an extremely difficult position regarding South Africa’s fiscal accounts.
Despite progress being made through fiscal consolidation, which limits state spending, South Africa’s economy is still not growing fast enough to meaningfully reduce the debt-to-GDP ratio and generate more tax revenue organically.
Roodt explained at the latest BizNews Conference that the ideal situation for a state is for its economy to grow at a rate that results in additional tax revenue being collected without tax rates being increased.
In South Africa, this is not the case, with the country’s economy effectively stagnating over the past 15 years and its growth rate now below the interest rate the government pays on its debt.
This means that over time, all else being equal, the state’s debt burden will compound at a faster rate than tax revenue and ultimately lead to a financial crisis of some sort.
One way to get out of this predicament is to raise tax revenue by increasing tax rates. However, Roodt said this will be unsuccessful in South Africa.
“We have passed the breaking point already. That is because we are too far along the Laffer Curve. There is no way the Finance Minister can increase taxes anymore,” Roodt said.
This was seen in the reversal of the minister’s planned two-stage VAT hike proposed in the 2025 Budget.
Roodt said the other evidence pointing to South Africa going too far out on the Laffer Curve is the country’s highly concentrated PIT and CIT tax bases.
Only 2.6% of South Africans pay over 66% of the income tax, and 1,051 companies account for 72.3% of all CIT.
Conversely, a reduction in these tax rates will most likely boost tax revenue through faster economic growth created by increased investment.
This is based on an understanding of the Laffer Curve, developed by economist Arthur Laffer in 1974. The Laffer Curve shows the relationship between tax rates and total tax revenue.
It posits that total tax revenue is most likely not maximised when tax rates are at 100% because this disincentivises workers from earning higher wages.
A similar phenomenon occurs with companies, where higher tax rates discourage investment and growth, which would otherwise generate additional revenue.
SARS squeezing tighter than ever
Efficient Group economist Dawie Roodt
Roodt explained that the Finance Minister has one major binding constraint – he does not have full control over the government or the economy.
The minister has to rely on other actors to produce policy that facilitates investment and economic growth.
This leaves the Finance Minister and the National Treasury with effectively one lever to pull, which is enhanced compliance through SARS.
By investing in SARS and pushing it to be more aggressive in clamping down on non-compliance, the state can boost revenue collection and bolster its finances.
This is the case even in South Africa’s stagnant economy, where a significant amount of tax is lost through non-compliance and illicit economic activity.
“What the Finance Minister has been doing is giving SARS more money, and they are getting more aggressive in collecting tax,” Roodt explained.
“Effectively, what is happening is that money is being taken out of the productive side of the economy and given to the unproductive side of the economy.”
While an increasingly aggressive SARS may not be popular, Roodt previously explained that it is much more politically palatable than raising tax rates.
The Finance Minister’s tactic of using SARS to squeeze more revenue from a stagnant economy appears to be working.
Outgoing SARS Commissioner Edward Kieswetter revealed last week that the revenue service collected more than R2 trillion in a single tax year for the first time in its history.
The amount of tax collected by SARS rose by 8.2% year-on-year, which is significantly higher than South Africa’s economic growth rate of 1.1% for 2025.
Roodt warned that while this tactic is working now, it will not be successful forever. SARS will eventually close the compliance gap and push South Africans to minimise their tax liabilities.
The only way to sustainably grow tax revenue over time is through faster economic growth on the back of increased investment and employment.
Roodt said the government has room to increase VAT, as it is a broad-based tax that is relatively easy to administer and hard to avoid.
This echoes comments from the Organisation for Economic Cooperation and Development, which said that South Africa cannot raise PIT or CIT rates, but has space to increase VAT.
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