Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/283835 
Year of Publication: 
2023
Series/Report no.: 
WIDER Working Paper No. 2023/139
Publisher: 
The United Nations University World Institute for Development Economics Research (UNU-WIDER), Helsinki
Abstract: 
South Africa has a progressive broad-based personal income tax system with relatively few tax expenditures. The two most important are the medical contribution plus additional tax credits for medical expenses, and the deductions allowed for retirement contributions. A pertinent question for tax reform in South Africa is whether redistributive gains can be achieved by restructuring expenditures in the personal income tax system. This paper considers the redistributive implications of converting the tax deduction for retirement contributions to a tax credit. This would build on the gains achieved by introducing a medical tax credit system in 2012. We analyse the tax revenue gains/losses of income groups and in total in terms of distributional effects and progressivity outcomes using a static microsimulation model based on data for the 2019/20 tax year. We find a high concentration of taxpayers in terms of taxable income and retirement contributions. The concentration of contributions is highly skewed towards lower- and middle-income earners, whose annual contribution amounts are low compared with higherincome earners. We recommend a conversion rate that considers the current distribution of taxpayers contributing to retirement funds. Converting the pension contribution deduction to a tax credit would raise additional revenue and make the tax system more progressive, benefiting low-income earners with marginal tax rates of less than the proposed conversion rate. The revenue gained would provide increased fiscal space to fund social expenditure or reduce government debt. Further distributional and behavioural analyses are needed on low-income earners and those earning below/above the minimum tax threshold, to refine understanding of the impact on lowand middle-income earners' contributions to retirement funds.
Subjects: 
retirement fund contribution
tax expenditure
microsimulation
tax credit
JEL: 
H23
H24
Persistent Identifier of the first edition: 
ISBN: 
978-92-9267-447-2
Document Type: 
Working Paper

Files in This Item:
File
Size
459.19 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.