South Africa has the world’s most progressive tax system, according to a new report. South Africa is also, by another measure, the world’s most unequal country — making it a cautionary example for U.S. liberals about the limited power of taxation to remedy inequality.
Yes, taxing the rich more and the poor less can have benefits, but many experts argue inequality is more meaningfully addressed by spending on public programs that provide for people’s basic needs while giving them an opportunity to get ahead.
In particular, that requires ensuring people have access to education, training, transportation and health care. And funding those enterprises requires more than just soaking the rich. In northern European countries — where economists have found that people who are born poor are more likely to make it into the middle class — governments also rely on broad taxes that force the middle class to pay more as well.
"The basic story is taxes do not change the income distribution," said Graham Glenday, a tax scholar at Duke University who was born in Cape Town, South Africa and plans to retire there.
"Changing the income distribution is much more of a dynamic thing that comes about if poor people can actually move up," he said. "That obviously takes, sometimes, generations."
The new report, published Sunday by Oxfam, ranks 152 countries on how well their economic policies are designed to address inequality. South Africa ranks first on taxation. The rich pay steeper rates, the corporate tax is hard to shirk and a national value-added tax includes exemptions for food and other staples that are major expenses for the poor.
"It’s quite an efficient system that tries, to the extent that’s possible, to really, kind of, balance the equation," said Sipho Mthathi, the director of Oxfam South Africa. "It is one of the most efficient tax systems in the world."
But despite ranking first in tax redistribution, South Africa ranks slides to 21st in the overall measure of addressing inequality, just ahead of the United States at 23rd. A poor score on the labor market — South Africa does not have a minimum wage, for example — brings down the country’s general ranking.
The other countries in the top 25 are all developed nations, almost all of them in Europe. Sweden ranks first, followed by Belgium, Denmark and Norway.
There are many methods of measuring inequality, but among the most common is the Gini coefficient — a measure of the share of income that would have to be redistributed to achieve perfect equality. Based on the Gini coefficient, South Africa is the most unequal country in the world among those for which data are available, according to the World Bank.
As of 2011 — the most recent year for which data are available from the bank — the coefficient was 0.63 in South Africa. Data from the Organization for Economic Cooperation and Development (OECD) show that inequality has increased in South Africa since 2000, when the Gini coefficient was 0.58.
The coefficient for the United States was just 0.41 as of 2013, but that figure is still relatively high for a rich country.
It is difficult to compare economic policies across countries. Different approaches may work better for some countries than others, and the data is not always available in the same form. Any ranking necessarily involves a degree of subjective judgment.
For instance, Oxfam did not rank countries’ systems of taxation according to a strict measure of fiscal progressivity — that is, the distribution of the burden on people of different levels of income. (The northern European and Scandinavian tax systems also perform well in the report, despite the relatively high taxes paid by the middle class in those countries.)
Instead, the authors of the report considered several factors. South Africa performed well on all of them.
The South African government consistently collects between 27 percent and 29 percent of the country’s gross domestic product in revenue, Glenday said. He added that those numbers are comparable to those for the United States — where general government revenue totaled 33.5 percent of GDP in 2015, according to the OECD.
That is despite the fact that the United States is a much richer country, where taxpayers can afford to pay much more. In the United States, GDP per person is more than 10 times that of South Africa.
Indeed, Americans pay only 68 percent to 71 percent of the maximum amount of taxes that the government could theoretically collect, according to researchers at the International Monetary Fund. The estimates for South Africa are higher — between 75 percent and 76 percent, depending on how the maximum is calculated.
South Africa is able to collect so much in taxes in part because of a bureaucracy that is unusually effective for a developing country. While corruption is a serious problem in South Africa, the tax authorities have a reputation for professionalism.
"They collect it very competently," Glenday said.
Hefty penalties for cheating the system discourage abuse, according to Mthathi. "It’s created a culture where it’s not easy for people to just not follow the rules," she said.
Another factor that might make South Africa’s tax system particularly progressive is that about one fifth of tax revenue comes from taxes on corporate income. That is roughly twice the share of U.S. taxes that is paid by corporations.
People who own corporations, whether privately or in the form of publicly traded stock, tend to be wealthier, and most economists believe that steeper corporate taxes tend to favor the poor and the middle class. An important exception is Kevin Hassett, President Trump’s nominee to serve as chairman of the White House’s Council of Economic Advisers. Hassett has argued that workers wind up paying a substantial share of corporate taxes in the form of reduced wages.
By Oxfam’s reckoning, though, the United States would fall in the rankings from 23rd to 29th if Trump’s agenda were implemented.
Despite decades of progressive, efficient tax policy in South Africa, the country’s extreme inequality is stubbornly persistent. "It doesn’t mean that the country doesn’t have problems," Mthathi said.
In particular, she said, South Africa could spend the money that it collects more efficiently to reduce poverty and create opportunity. The problem of corruption makes it more difficult for the government to achieve those aims.
And as Glenday pointed out, South Africa’s public education system is notoriously poor — a grave obstacle to economic development over the long term. That is arguably a legacy of the era of apartheid, when schools for white students were much better than those for students of other ethnicities.
Without good tax policy, South Africans might be much worse off, but that country’s example suggests that progressive taxes on their own are not a solution to inequality.
"It’s not just about collecting money, and making sure that is done is fairly and progressively," Mthathi said.
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