Progressive tax reforms targeting wealth, dividends and corporate profits could raise billions of rands.
The potential to raise revenue by taxing wealth and high-income earners, rather than relying on spending cuts and taxes that place a greater burden on the poor, is massive according to a new report by the Alternative Information and Development Centre (AIDC).
AIDC held a tax justice workshop in Johannesburg on Friday, bringing together activists, labour representatives and civil society organisations to discuss alternatives to austerity and a progressive tax system.
Presenting the report, Chloé van Biljon, AIDC’s tax justice project officer, said the country’s persistent unemployment, poverty, inequality and economic stagnation requires the state to mobilise more resources for public services, social protection and industrial development. “The state needs to not only maintain the current level of public services and social support but has to expand them to deal with these problems,” van Biljon said.
One of the report’s proposals is to abolish the medical aid tax credit, which costs the state about R30-billion a year, and redirect the money towards social protection, including the Social Relief of Distress (SRD) grant. For the state to continue providing such a benefit to medical aid members while millions of poorer South Africans rely on limited social assistance, cannot be justified.
The report also proposes replacing the retirement fund contribution deduction with a tax credit. Van Biljon said the existing system rewards higher-income earners more because the value of the deduction depends on the tax rate they pay on their highest portion of income. A tax credit, she said, would make the benefit more equal. Research cited by AIDC estimates that the reform could raise an additional R23-billion while improving retirement saving incentives for lower-income earners.
Another proposal is to bring dividends into the progressive personal income tax system instead of applying a flat rate of 20%. AIDC estimates this could raise another R18-billion.
Taken together, the proposed personal income tax reforms would generate about R83-billion a year. The report’s biggest revenue proposal is a net wealth tax targeting the richest 1% of South Africans, estimated at about 350,000 people with net wealth above R5.6-million.
The proposed tax would use progressive rates, with the rate increasing as wealth rises. Drawing on research by economist Aroop Chatterjee, AIDC estimates that the measure could raise between R100-billion and R235-billion a year, depending on its design and the extent of tax avoidance and evasion.
The report also proposes expanding financial transaction taxes beyond shares to include bonds and derivatives, introducing a windfall tax on extraordinary mining profits and establishing a sovereign wealth fund to support economic diversification.
On international taxation, AIDC calls for withholding taxes on cross-border service fees, a tax haven defence act and a review of South Africa’s double-taxation agreements.
Van Biljon said the proposals are aimed at raising revenue from those with the greatest ability to pay rather than increasing value-added tax (VAT) or fuel levies, which place pressure on poorer households. Austerity and cuts to public spending, she said, only weakens hospitals, schools and other public services while undermining efforts to create jobs.
The proposals found resonance among organised labour.
Speaking to Elitsha, Tengo Tengela, trade and industrial policy coordinator in the Congress of South African Trade Unions (Cosatu) policy group, said taxation was fundamentally a re-distributive instrument. “If you impose regressive tax, actually you are distributing wealth from the poor to the rich, not the other way around,” Tengela said. The ability of the super rich to avoid or minimise taxation through tax havens and profit shifting, particularly where multinational companies and complex financial arrangements were involved, amounts to theft, he said.
Tengela also raised concerns about taxation in the mining sector, referring to the relationship between mining profits, tax and the distribution of the country’s mineral wealth. He pointed to Marikana in discussing broader questions about how South Africa’s natural resources do not benefit workers and communities.
The effects of austerity are visible in public institutions and services, including clinics, home affairs, border management and the Independent Electoral Commission. “Austerity is not a theoretical thing. It is a practical thing that is happening and is impacting negatively on the poor,” he said.
For Tengela, the tax debate cannot be separated from the struggle over public services and the distribution of wealth.
He said trade unions and civil society organisations should use research and evidence to build public campaigns for a more progressive tax system. “The good thing about this report is that it is an evidence-based thing that you can table when you negotiate in whatever platform of social dialogue,” he said, not minimising the importance of mobilisation beyond formal negotiations.
Sithembiso Bhengu, director of the Chris Hani Institute, said taxation should be understood as part of a social contract linking the political, economic and social responsibilities of the state. He argued that revenue raised through progressive taxation should ultimately translate into better public schools, healthcare facilities, roads, housing and energy, in rural communities particularly.
Bhengu also called for stronger measures by the South African Revenue Service to address illicit financial flows and highlighted the potential of funds managed by the Public Investment Corporation and the Government Employees Pension Fund to be invested productively.
“The AIDC report places these proposals within a broader argument that South Africa’s fiscal challenges should not be addressed through austerity alone. Instead, it calls for a tax system that raises more revenue from wealth and high incomes while protecting poorer households,” said Bhengu.
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