Redistribution of Income through

Taxation and Spending in South Africa

Two Main Questions

• How well do taxes and spending in South

Africa redistribute income between the rich

and poor?

• What is the impact of taxes and spending on

poverty and inequality in South Africa?

Innovations

• Uses the 2010/11 Income and Expenditure Survey (IES).

• Assesses both taxes and spending at the same time.

• Applies the Commitment to Equity (CEQ) methodology, allowing for cross-country comparability.

For more details, see http://www.commitmentoequity.org.

Key results

1. The tax and social spending system is overall

progressive.

2. Fiscal policy leads to reductions in poverty and

inequality that are the largest achieved in the set of

12 middle income countries.

Further poverty and inequality reductions will require

more inclusive economic growth.

Taxes

• Personal income tax

• Payroll taxes: UIF and SDL

• VAT

• Excise duties on alcohol and tobacco

• Fuel levy

Direct taxes are absolutely progressive.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Cu

mu

lati

ve

Pro

po

rtio

n o

f m

ark

et i

nco

me/

tax

Cumulative Proportion of the Population

South Africa Concentration Curves of Direct Taxes

(share paid by market income deciles)

Direct taxes

Market Inc

45 Degree Line

Source: Own estimates for South Africa based on IES 2010/11.

…but less so than in other countries.

Sources: Armenia (Younger et al, 2014), Bolivia (Paz et al, 2014), Brazil (Higgins and Pereira, 2014), Ethiopia (Hill et al, 2014), Indonesia

(Jellema et al 2014), Mexico (Scott, 2014), Peru (Jaramillo, 2014), Uruguay (Bucheli et al, 2014), and own estimates for South Africa based on

IES 2010/11.

0.13

0.23

0.25

0.27

0.28

0.30

0.43

0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45 0.50

South Africa (2010)

Armenia (2011)

Uruguay (2009)

Brazil (2009)

Ethiopia (2011)

Mexico (2010)

Peru (2009)

Progressivity of South Africa’s Direct Tax System: The Kakwani

Coefficient

In contrast, indirect taxes are slightly

regressive on account of excise taxes

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Cum

ula

tive

pro

po

rtio

n o

f

dis

po

sab

le in

com

e/ta

x

Cumulative proportion of the population

South Africa Concentration Curves of Indirect Taxes (share paid by disposable income deciles)

Disposable Income VAT Excise Tax

Fuel Levy 45 Degree Line

Source: Own estimates for South Africa based on IES 2010/11.

Overall, the tax system is globally

progressive.

Sources: Own estimates for South Africa based on IES 2010/11.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Cum

ula

tive

Pro

po

rtio

n o

f T

ax

Cumulative Proportion of the Population

South Africa. Concentration Curves of All Taxes, 2010 (share of market income)

Market Inc

45 Degree Line

All taxes

How progressive is social

spending in South Africa?

• Direct cash transfers

• Health

• Education

• Free basic services

Direct cash transfers are absolutely

progressive…

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0 1 2 3 4 5 6 7 8 9 10

Cu

mu

lati

ve

Pro

po

rtio

n o

f In

com

e/S

pen

din

g

Cumulative proportion of the population by market income deciles

Direct Cash Transfers by Category

Concentration Curves for Transfers and Lorenz Curve for

Market Income

Lorenz for Market Income

Direct Transfers

Old -age pension

Child support grant

Disability grant

Population Shares

Sources: Own estimates for South Africa based on IES 2010/11.

Cash transfers are large relative to the

incomes of the poor

Sources: Argentina (Lustig and Pessino, 2014), Armenia (Younger et al, 2014); Brazil (Higgins and Pereira, 2014), Mexico (Scott, 2014),

Uruguay (Bucheli et al, 2014), and own estimates for South Africa based on IES 2010/11.

0%

200%

400%

600%

800%

1000%

1200%

Argentina(2009)

Armenia(2011)

Brazil (2009) Mexico(2010)

South Africa(2010)

Uruguay(2009)

Incidence of Direct Cash Transfers (share of market income deciles)

Poorest decile Richest decile

FBS are more progressive when targeted

Source: Own estimates based on IES (2010/11).

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0 1 2 3 4 5 6 7 8 9 10

Cu

mu

lati

ve

Pro

po

rtio

n o

f In

com

e/S

pen

din

g

Cumulative proportion of the population by market income deciles

Concentration Curves for Free Basic Services

Lorenz for Market Income

FBS as a transfer

FBS as a subsidy

Population Shares

Health and education spending are

progressive in absolute terms..

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0 1 2 3 4 5 6 7 8 9 10

Cu

mu

lati

ve

Pro

po

rtio

n o

f In

com

e/S

pen

din

g

Cumulative proportion of the population by market income deciles

Concentration of Health Spending and Lorenz Curve

for Market Income

Lorenz for Market Income

In-kind Education

In-kind Health

Population Shares

Source: Own estimates using IES, 2010/11 and NIDS 2008w1.

However, the results vary according to

the level of education

Source: Own estimates using IES, 2010/11.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Preschool Primary Secondary Post

secondary

training

Adult training

centres

University

South Africa. Percent of Target Population

Income < $1.25 $1.25—$2.5 $2.5—$4 $4—$10 $10—$50 > $50

Social spending as a whole is strongly

progressive

0.77

0.50

0.16

0.01

0.00

-0.11

-0.12

-0.15

-0.17

-0.19

-0.19

-0.25

-0.32

-0.34

-0.37

-0.39

-0.60 -0.40 -0.20 - 0.20 0.40 0.60 0.80 1.00

Market income Gini

Tertiary Education Spending

Free basic services (as indirect subsidies)

Other grants

Health Spending

Pre-school education

Secondary School Education

Grant-in-aid

Old age pension

Pre and Primary education

Primary education

Disability grant

Foster Care grant

Child support grant

Care dependency

Free basic services (as transfers)

South Africa. Concentration coefficients for Spending

Source: Own estimates using IES, 2010/11.

What is the net impact of taxes and

government transfers on poverty and

inequality?

17

Poverty declines substantially due to

fiscal policy

18

+ direct

transfers

- Indirect

taxes

+ indirect

subsidies

- direct

taxes

40.8% 29.0%

46.5%

34.2%

39.6%

52.3% 50.1%

0%

10%

20%

30%

40%

50%

60%

Market Income Net Market Income Disposable Income Post-fiscal Income

National food poverty line1

National lower bound poverty line 2

National upper bound poverty line3

With the effect on poverty larger than other

middle income countries.

19

+ direct

transfers

- Indirect

taxes

+ indirect

subsidies

- direct

taxes

46.2 46.4

33.4

39

0

10

20

30

40

50

60

70

Market Income Net Market

Income

Disposable

Income

Post-Fiscal

Income

Per

cen

t

Poverty Headcount at $2.50 per day (PPP)

Armenia

Bolivia

Brazil

Indonesia

Mexico

Peru

South Africa

Uruguay

Direct cash transfers are highly effective at

redistributing fiscal resources towards the poor.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0-13%

-11%

-9%

-7%

-5%

-3%

-1%

Argentina

(2009)

Brazil

(2009)

Indonesia

(2012)

Mexico

(2010)

Peru

(2009)

South

Africa

(2010)

Uruguay

(2009)

Eff

ecti

ven

ess

Ind

icat

or

Ch

ang

e in

US

$2

.50

-a-d

ay P

ov

erty

Hea

dco

un

t Poverty Reducing Effectiveness

Change in Poverty Rate Effectiveness Indicator

Source: Argentina (Lustig and Pessino, 2014); Brazil (Higgins and Pereira, 2014); Indonesia (Jellema et al), Mexico (Scott, 2014); Peru (Jaramillo,

2014), Uruguay (Bucheli et al, 2014); and Inchauste, Lustig, Maboshe, Purfield and Woolard (2014) for South Africa based on IES 2010/11.

Inequality falls substantially with

Government interventions,…

0.771 0.75

0.694 0.695

0.596

0.25

0.35

0.45

0.55

0.65

0.75

0.85

Market Income Net Market

Income

Disposable

Income

Post-Fiscal

Income

Final Income

The Gini Coefficient before and after Taxes, Transfers and Free

Services, Education and Health Falls by over one-fifth

- direct

taxes + transfers

& FBS

- VAT, Fuel,

excise + Educ,

+Health

…more so than in other middle-income

countries…

Source: Armenia (Younger et al, 2014); Bolivia (Paz et al, 2014); Brazil (Higgins and Pereira, 2014); Ethiopia (Woldehanna et al, 2014); Indonesia (Jellema et al 2014); Mexico (Scott, 2014); Peru (Jaramillo, 2014); Uruguay (Bucheli et al, 2014); Lustig(2014) based on Costa Rica (Sauma et al, 2014), El Salvador (Beneke de Sanfeliu et al, 2014), and Guatemala (Cabrera et al, 2014); and own estimates for South Africa based on IES 2010/11.

-0.20

-0.18

-0.16

-0.14

-0.12

-0.10

-0.08

-0.06

-0.04

-0.02

0.00

Change in Gini

…but inequality is still higher after fiscal policy than

inequality prior to fiscal policy in other countries

0.579

0.771

0.694

0.596

0.25

0.35

0.45

0.55

0.65

0.75

Market Income Net Market Income Disposable Income Post-Fiscal Income Final Income

Gini Coefficient for Each Income Concept

Brazil (2009)

Indonesia

(2012)

Mexico (2010)

South Africa

(2010)

0.439

- direct

taxes + transfers

& FBS

- VAT,

- Fuel

- Excise

+ Educ,

+Health

Conclusions

• Taxes are slightly progressive and social

spending is highly progressive.

• South Africa performs very well when

compared with other middle income countries.

• Further poverty and inequality reductions

require more inclusive economic growth.

THANK YOU

25

References

• Bucheli, Marisa, Nora Lustig, Máximo Rossi, and Florencia Amábile. 2014. “Social

Spending, Taxes, and Income Redistribution in Uruguay.” Pubic Finance Review.

Published online 20 Nov 2013.

• Higgins, Sean and Claudiney Pereira. 2014. “The Effects of Brazil’s Taxation and

Social Spending on the Distribution of Household Income.” Pubic Finance Review.

Published online 20 Nov 2013.

• Hill, Ruth, Eyasu Tsehaye, and Tassew Woldehanna. 2014. "The Distributional

Impact of Fiscal Policy in Ethiopia". Background Paper for World Bank Poverty

Assessment. (forthcoming)

• Jaramillo, Miguel. 2014. “The Incidence of Social Spending and Taxes in Peru.”

Pubic Finance Review. Published online 20 Nov 2013.

• Jellema, Jon, Matthew Wai-Poi, and Rythia Afkar. 2014. "the Distributional Impact

of Fiscal Policy in Indonesia". World Bank (forthcoming).

References

• Leibbrandt, M.; I. Woolard; A. Finn; and J. Argent (2010), “Trends in South African

Income Distribution and Poverty since the Fall of Apartheid”, OECD Social,

Employment and Migration Working Papers, No. 101, OECD Publishing, OECD.

doi:10.1787/5kmms0t7p1ms-en.

• Lustig, N. and S. Higgins. 2013. “Commitment to Equity Assessment

(CEQ): Estimating the Incidence of Social Spending, Subsidies and

Taxes. Handbook,” CEQ Working Paper No. 1, revised September 2013.

• Lustig, N. 2012. “Commitment to Equity: Diagnostic Questionnaire” CEQ Working

Paper No. 2.

• Lustig, N. and S. Higgins. 2012. "Fiscal Incidence, Fiscal Mobility and the Poor: a

New Approach,” CEQ Working Paper No. 4, September.

• Lustig, N., Pessino C., and J. Scott. 2013. "The Impact of Taxes and Social

Spending on Inequality in Argentina, Bolivia, Brazil, Mexico, Peru, and Uruguay:

Introduction to the Special Issue". Pubic Finance Review. Published online 20 Nov

2013.

References

• Lustig, Nora and Carola Pessino. 2014. “Social Spending and Income

Redistribution in Argentina in the 2000s: the Rising Role of Noncontributory

Pensions.” Pubic Finance Review. Published online 20 Nov 2013.

• Lustig, N. 2014. “Consumption Taxes, Inequality and the Poor.” CEQ Working

Paper No. 23, Center for Inter-American Policy and Research and Department of

Economics, Tulane University and Inter-American Dialogue.

• Paz Arauco, Veronica, George Gray Molina, Wilson Jiménez Pozo, and Ernesto

Yáñez Aguilar. 2014. “Explaining Low Redistributive Impact in Bolivia” Pubic

Finance Review. Published online 20 Nov 20

• Scott, John. 2014. “Redistributive Impact and Efficiency of Mexico’s Fiscal

System.” Pubic Finance Review. Published online 20 Nov 2013.

• Younger, Stephen D. and Artsvi Khachatryan. 2014. "Fiscal Incidence in Armenia".

Background Paper for World Bank Armenia Public Expenditure Review.

(forthcoming)