Figure 22 shows that when -0.16 combined with in-kind -0.14 transfers, South Africa ranks -0.12 among the more effective -0.10 countries in translating its -0.08 social spending into -0.06 reductions in inequality. -0.04 This is true relative to all -0.02 countries for which similar 0.00 analysis has been conducted, as well as relative to comparable middle-income, both in terms of their GDP per capita and the size of their population. The reduction in inequality owing to in-kind transfers amplify the already high benefits from direct transfers. The social spending items that we assess in this study which are equivalent to 14.9 South Africa based on IES 2010/11./11.11. percent of GDP in direct and in-kind transfers reduces inequality by 0.14 of a Gini coefficient.

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-0.16 1.6<br>-0.14 1.4<br>-0.12 1.2<br>-0.10 1.0<br>-0.08 0.8<br>-0.06 0.6<br>-0.04 0.4<br>-0.02 0.2<br>0.00 0.0<br>Change in Gini from In-Kind Transfers<br>Change in Gini from Direct Transfers<br>Effectiveness indicator for Direct Transfers<br>Effectiveness Indicator for Total Social Spending<br>Change in Gini<br>Effectiveness Indicator<br><!-- End of picture text -->

Sources: Argentina (Lustig and Pessino, 2014), Armenia (Younger and Khachatryan, forthcoming), Bolivia (Paz et al, 2014), Brazil (Higgins and Pereira, 2014), Indonesia (Jellema et al forthcoming), Mexico (Scott, 2014), Peru (Jaramillo, 2014), Uruguay (Bucheli et al, 2014), and own estimates for South Africa based on IES 2010/11./11.11.

In sum, for the fiscal instruments we examined the South African fiscal system lifted some 3.6 million individuals out of poverty when measured as those living on less than US$ 2.50 per day (PPP adjusted). When taxes and all social spending that we examined are combined, the gap in incomes between the rich and poor goes from a situation where the incomes of the richest decile are over 1,000 times higher than the poorest to one where they are about 66 times higher.

# **VI. Conclusions and Policy Implications**

This paper aimed to assess the distributional impact of the main elements of general government taxation and spending in South Africa. On the tax side, the paper has analyzed the incidence of 64.5 percent of total tax revenue, including the personal income taxes, VAT, excise taxes on alcohol and tobacco, and the general fuel levy. On the expenditure side, the paper has analyzed the incidence of 43 percent of general government expenditures, focused on social spending including direct cash transfers, free basic services, health and education spending.

The results show that South Africa uses its fiscal instruments to effectively reduce market income poverty and inequality through a slightly progressive tax system and highly progressive social spending but despite this the levels of inequality and poverty remain unacceptably high. The rich in South Africa bear the brunt of taxes that we examined and the government redirects these resources to the poorest in society to raise their incomes. Only the top 3 deciles of the income distribution pay more in taxes that they receive in transfers. As a result of the fiscal system, some 3.6 million individuals are lifted out of poverty when measured as those living on less than US$2.50 per day (PPP adjusted). Inequality goes from a situation where the incomes of the richest decile are over 1,000 times higher than the poorest, to one where they are about 66 times higher. The Gini coefficient falls from 0.77 before taxes and social spending programs to 0.59 after their application (or 0.695 when the monetized value of health and education spending are excluded).

On the tax side, fiscal policy relies on a mix of progressive direct taxes such personal income taxes, and slightly regressive indirect/consumption taxes, that when combined generate a slightly progressive tax system. Direct taxes (PIT and payroll taxes) were progressive, since the richer deciles pay a proportionally higher share of total direct tax collections than their share of market income. Moreover, because they make up a relatively high share of GDP, 35