On the redistributive impact of the personal income tax: Evidence from South Africa

Riedel, Nadine; Zinke, Ida

Abstract

South Africa is one of the most unequal economies globally. In this paper, we examine the design of its personal income tax (PIT), with a focus on its redistributive function. We apply the Pfähler decomposition method to analyse the redistributive effects of key components of the South African PIT system, including the marginal tax rate schedule, the definition of gross taxable income, and the provision of tax deductions and tax credits. Our findings highlight that the marginal tax rate schedule is the primary driver of redistribution, while tax expenditures often favour higher-income individuals, resulting in adverse redistributive effects. Additionally, we assess how recent changes to the PIT schedule have influenced redistribution. Among others, we show that below-inflation adjustments of marginal tax thresholds increased post-tax inequality and weakened the system’s redistributive impact. We conclude by discussing policy options to enhance the redistributive capacity of South Africa’s PIT system.

Keywords
South Africa, personal income tax, Pfähler decomposition, redistribution, tax expenditures