Tax Expenditure

Why your real tax burden is higher than you think

South Africa’s middle class tax burden is much heavier than the official figures might suggest. We can understand why by taking a closer look at the real effective tax rate of a middle class household.

When Pravin Gordhan announced the 2017 national budget, much of the focus was on the new top income tax rate of 45% for high income earners. But that number doesn’t tell the whole story.

Residents pay taxes to fund infrastructure and public services, and can reasonably expect to receive public goods in return. At the most basic level, these goods include security, education, and healthcare.

The South African reality is that these services are inadequate. Public schools do not properly equip learners for higher education or to compete in the global workforce, state hospitals are understocked and understaffed, and crime is persistently high.

Consequently, middle class households are compelled to pay for private goods simply to obtain a level of service that they might reasonably expect to be provided in return for paying their taxes. In effect, they are paying for these services twice.

The super rich will often choose elite private services anyway. The decision to send your children to an ancient school attended by princes in tailcoats may be based on more than strictly pedagogical reasons. Many middle class earners will not feel they are making a free consumer choice. They believe that it is necessary to send their kids to a private school because there is no alternative.

Calculating the real cost

Let’s consider a household consisting of two adults and their two children. Both parents work and have a combined income, before tax, of R1.5 million.

We will suppose Parent A earns a salary of R70 000 per month, or R840 000 annually. Parent B earns R55,000 each month, which is R660 000 per year. Their combined monthly income is R106 250.

Their house is valued at R2.5 million.

There is no state pension in South Africa. We will assume that our couple saves 20% of their income, in line with the Statistics South Africa average for the top decile of earners.

A basic family medical aid package will cost about R4 000 per month (R48 000 p.a.)

Security (an alarm system connected to armed response) is around R1 500 monthly (R18 000 p.a.)

Schooling is a major expense. South Africa’s most elite private schools have tuition fees of over R220 000 per student per year. We are going to assume an ordinary private school that provides decent education. For two children, total tuition expenses still come to a hefty R207 000 per year (R17 250 monthly).

What is the family’s effective tax burden? The most direct and significant tax is income tax, which comes to approximately 22% of the household income.  

We calculate that municipal rates and taxes will come to R1 284 per month.

There are also consumer taxes. Based on standard driving patterns, if the household spends R2 554 per month on petrol, the monthly fuel tax will amount to R918. We calculate VAT expenditure at R11 544.

Direct and indirect taxation therefore comes to approximately 33% of household income. That’s comparable to the United Kingdom in terms of expenditure, but without commensurate services. Our household is thus required to fork out an additional 18% of their income for healthcare, schooling and security, taking the effective expenditure to a whopping 51.3%.

It’s no wonder the middle class is feeling squeezed.

There are obvious historical reasons for South Africa’s small tax base. A closer look at household expenditure reveals something less obvious: it is arguably the middle class, not the very top, that feels the tax pinch hardest.

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