Tax freedom day: South Africans finally start earning for themselves

Key topics:

• South Africans worked 131 days to cover 2024’s tax burden

• SOEs and bloated government spending strain the economy

• High taxes hurt growth, jobs, and deepen poverty

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By Leon Louw & Garth Zietsman*

On 11 May 2024 South Africans started working for themselves instead of the government. That was Tax Freedom Day (TFD), a day to celebrate. TFD is the day that symbolises how much of the average person’s wealth the government takes during a tax year. Like other countries, we celebrate the date in the current year when last year’s data becomes available. 

Think of it as a day of liberation from compulsory government service. It symbolises the day when we start keeping what we earn. The average South African worked 131 days to produce what the government took in 2024. 

When there is a budget, statisticians estimate what TFD would be for the current year based on projected GDP, taxation and spending. This year there is no budget yet, so estimated TFD for 2025 must wait. Meanwhile we celebrate the symbolic day on which we South Africans started working for ourselves; the day on which we had paid our tax bill in full. From 1 January until 11 May, all the income earned by South Africans was the amount needed to pay for one year of government. 

TFD is an important symbol because taxes shift resources from private individuals to government. South Africa’s future depends on private sector growth. High taxation slows, not grows, an economy. 

On TFD, we review the role of government and whether we get value for money, efficient service delivery, and effective policies. 

TFD can be thought of in different ways. In effect, the government took more than one in every three days, or about three days of every week. It is as if workers and employers worked for the government on Monday-Tuesday and for themselves on Wednesday-Thursday-Friday. 

If reduced to the eight-hour working day, nearly three of the hours (2 hrs 52.2min) were for the government.

In 1981 it was 94 days and in 1994, 114 days. Those were respectively 37 and 17 days earlier than in 2024. It took a mere generation to add over five weeks per year to pay government. 

What did we got for the increase? Less than zero. Inflation-adjusted incomes fell. People are poorer. Tax increases are disastrous especially for the poor.

The time spent working for the state is not evenly spread. The bottom half, the top 10% and remaining 40% of taxpayers can be thought of as working 56, 133 and 151 days respectively for the government.

We have passed the peak of the Laffer Curve, which is the point of ‘diminishing returns’ after which higher tax rates generate less revenue because people start avoiding and evading tax, and start producing less wealth. The only way to increase revenue in South Africa now is to cut spending. The problem is compounded by the fact that, according to the world’s experience, higher taxes will not solve the deficit and debt burden because higher tax rates are anti-growth, anti-jobs and, ultimately, anti-tax. 

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An obvious target for spending cuts is  the 700 apartheid-era dinosaurs, state-owned enterprises (SOEs). They consume wealth and prevent development because they discourage private investment, jobs and taxable income. The government has already bailed SOEs out with R520 billion, and the public bear the burden of many more billions in soaring implicit and explicit SOE debt. SOE subsidies so far could have built two million RDP houses or added over R18,000 to every social grant. 

Another obvious target is excessive government employment. The wage bill alone is over 30% of the budget, the world’s highest percentage of GDP. Due to mismanagement, many jobs are wealth-consuming sheltered employment. Such wasted skills should be in the productive private sector. Higher government wage bills coincide with higher unemployment internationally.

Not surprisingly, most people, including two thirds of ANC voters, are opposed to tax increases. Taxes are so divisive that they sometimes precipitate civil war. 

Lower growth caused by higher taxes compounded over the years leaves the next generation with as little as half the wealth it would have had. Had we grown at, say, seven percent since 1994 we would now have been one of the world’s wealthiest countries, at least six times wealthier than we are.

A popular delusion is that more revenue can be acquired through higher company taxes, and more capital gains tax.

There is really no such thing as ‘company tax’. Companies are a ‘legal fiction’. That is, they exist as an imaginary entity that represents all the ‘stakeholders’: workers, managers, shareholders, funders, consumers and so on. As President Reagan said, “You can’t tax business. Business doesn’t pay taxes. It collects taxes.”

Apart from the fact that companies have full-time experts finding ways to avoid and evade tax, no one has the slightest idea who really pays company tax. If company tax is doubled, who would get less? Consumers, workers, managers, shareholders, financiers, consultants or society in general? There is no way of knowing. It varies massively depending on each company’s unique circumstance, where consumer prices would rise, employees get laid-off, loans defaulted, or bankruptcy and so on.

If company taxes are eliminated, as they should be, who would benefit? Again, no one has the slightest idea. All that we know is that there would be more investment and employment, lower prices and more consumer choices, and more prosperity for all. 

As for capital gains tax, it penalises our best people: those who invest and save sensibly. It tends to be relatively harmless at very low levels such a one or two percent. When higher, it discourages investment, savings and capital formation. More seriously, it causes economic distortion, capital flight and waste. People are forced to concoct sub-optimal ways of avoiding and evading it through complex and costly schemes that baffle and bemuse bureaucrats. People who create and want to preserve capital always outsmart those who want to seize it.

If Minister Godongwana really wants prosperity, less poverty, more jobs and greater equality, he must set the country on a path towards TFD being at least one month earlier on 11 April instead of 11 May. Earlier TFDs are a precondition for addressing our terrible triplets: unemployment, inequality and poverty. 

*Leon Louw, CEO & Founder Freedom Foundation. Founder & past President, the Free Market Foundation

*Garth Zietsman, Freedom Foundation Statistician