# **1. Taxes and Fees**

How progressive are the taxes that we examine in this paper in South Africa? The analysis only evaluates the tax system along one dimension, its impact on equity. As mentioned above, it does not assess other important features of a tax system such as its efficiency—which measures the amount collected given the rate—, simplicity, and ease to administer.

# **Direct Taxes: PIT and Payroll Taxes**

Direct taxes in the incidence analysis for South Africa are comprised of Personal Income Tax (PIT) and contributions to the unemployment insurance fund and skills development levy social security (also known as payroll taxes). Table 3 shows concentration shares of market income and direct taxes as well as the cumulative distributions of market income and direct taxes. As one can observe in the cumulative distributions, based on the tax redistribution approach, direct taxes overall are progressive. We analyze the PIT and payroll taxes separately. In table 3 one can observe that the PIT is quite progressive, as the cumulative share of a tax paid by the bottom deciles of the population is lower than their share in market income. The burden of the PIT is borne overwhelmingly by the richer deciles. The wealthiest 20 (10) percent of individuals generated over 97 (87) percent of total PIT collections while their share in market income was equal to 81.4 (63.7) percent.

Table 3. Progressivity of direct taxes

||Marke<br>con|t income<br>centration|distributio<br>shares(in|n and<br>%)|Cu<br>cumulati|mulative d<br>ve concen|istribution<br>tration shar|and<br>es(in %)|
|---|---|---|---|---|---|---|---|---|
|Decile|Market<br>income<br>1/|Direct<br>taxes|Personal<br>income<br>taxes|Payroll<br>taxes|Market<br>income<br>2/|Direct<br>taxes|Personal<br>income<br>taxes|Payroll<br>taxes|
|1|0.1%|0.0%|0.0%|0.0%|0.1%|0.0%|0.0%|0.0%|
|2|0.2%|0.0%|0.0%|0.0%|0.3%|0.0%|0.0%|0.0%|
|3|0.5%|0.0%|0.0%|0.1%|0.7%|0.0%|0.0%|0.1%|
|4|0.8%|0.0%|0.0%|0.3%|1.6%|0.0%|0.0%|0.4%|
|5|1.5%|0.1%|0.0%|0.8%|3.1%|0.1%|0.0%|1.2%|
|6|2.7%|0.2%|0.1%|2.1%|5.8%|0.4%|0.1%|3.3%|
|7|4.5%|0.8%|0.4%|4.8%|10.3%|1.2%|0.5%|8.1%|
|8|8.3%|2.8%|2.0%|10.2%|18.6%|4.0%|2.5%|18.3%|
|9|17.7%|11.7%|10.6%|23.3%|36.3%|15.7%|13.1%|41.6%|
|10<br>Source:|63.7%<br>Own calcula|84.3%<br>tions based|86.9%<br>on IES 2010|58.4%<br>/11.|100.0%|100.0%|100.0%|100.0%|

1/ This is the distribution of market income for the population ordered by market income. All the others are concentration shares for the population ordered by market income.

2/ This is the cumulative distribution of market income; in other words, the Lorenz curves by decile.

Payroll taxes in the form of the skills development levy and UIF are progressive up to the eighth decile inclusive (right hand panel, table 3). However, they are locally regressive for the ninth decile. The tenth decile pays a lower share of the total contributions (58.4 percent) than its share in market income (63.7 percent). The lack of progressivity at the top is a reflection of the cap on contributions to the UIF. When looking at direct taxes as a whole, we find that they are progressive as the cumulative share of a tax paid by the bottom 90 percent the population is lower than their share in the market income.

Direct taxes are also progressive when measured in relative terms. For instance, the top decile pays 18.5 percent of its market income in PIT while the lowest six deciles pay next to zero percent of PIT, reflecting the fact that their 16