percent for those in the richest decile. However, this is partly offset by the fuel levy, which makes up a slightly higher share of the disposable income of the top deciles, 0.03 percent, compared to 0.02 percent for the bottom decile.<sup>42</sup> When these two factors are combined, figure 8A shows the burden of indirect taxes in percentage of disposable income is quite even across the income distribution compared to other middle-income countries. In comparison to our CEQ comparators, figure 8b shows that in Brazil and Mexico the overall burden of indirect taxation increases more sharply with income than it does in South Africa.

The Kakwani index shows that indirect or consumption-based taxes are broadly neutral in aggregate. Table 5 shows the overall index is -0.003. VAT and Fuel Levy are both slightly progressive each with a Kakwani index of about 0.02. In contrast, excise taxes are regressive, with a Kakwani index of -0.302.

Table 5. Measuring the Progressivity of Indirect Taxes

||VAT|Fuel|Excise|Three indirect taxes<br>together|
|---|---|---|---|---|
|Concentration<br>Curves|Progressive|Progressive|Regressive|Slightly Regressive<br>up to the seventh<br>Decile|
|Kakwani|0.020|0.025|-0.302|-0.003|

Source: Authors' own estimates based on IES 2010/11. If the Kakwani index is greater than zero, the tax is progressive, if it is between -0.1 and 0.1 the tax is neutral, and if it is below -0.1, the tax is regressive.

# **Overall Progressivity of Taxes**

To assess the progressivity of direct and indirect taxes combined, we add direct and indirect taxes and measure their incidence relative to market income. The Kakwani index for both taxes combined is equal to 0.028, reflecting that the tax system (i.e., of the taxes covered in this study) is _globally_ progressive. However, in figure 9 one can observe that the concentration curve and the Lorenz curve cross, indicating that there is no dominance. The slight regressivity at the lower end of the income distribution largely reflects the impact of the slight regressivity of indirect taxes (driven by the regressivity of excise taxes).

**2. Government Spending**

How progressive is social spending in South Africa? As we saw in the previous section, South Africa has higher social spending than other middle-income countries. But spending Figure 9. South Africa. Concentration Curves of All Taxes, 2010 <u>(share of market income)</u> <!-- Start of picture text -->
1.0<br>Market Inc<br>0.9<br>45 Degree Line<br>0.8<br>All taxes<br>0.7<br>0.6<br>0.5<br>0.4<br>0.3<br>0.2<br>0.1<br>0.0<br>0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0<br>Cumulative Proportion of the Population<br>Source: Own estimates based on IES 2010/11.<br>Cumulative Proportion of Tax<br><!-- End of picture text -->

more does not mean that the poor always benefit from such programs. Poorly targeted or designed social programs often result in the benefits leaking to higher-income groups. As with the tax side of the government’s budget, we therefore assess the question of who benefits from social spending in South Africa by examining each social program individually before combining them to assess the overall incidence of social spending. We assess the incidence of direct cash transfers—the old age non-contributory pension, the child support grant, the disability

> 42 Our estimates includes not only the direct amount of tax paid, but also ‘second round effects’  that include the impact of higher fuel prices on transport which in turns impacts all other commodities that use transport as an input. For more details on how this was done see Appendix 1.

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