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South Africa has spent three decades extracting an ever-greater share of national income in taxes, even as economic growth and investment have deteriorated, likely exceeding the point where further tax increases diminish growth and reduce long-term revenue collection. 

South Africa has spent much of the past three decades increasing the share of national output that the government collects in taxes, even as the economy has struggled to generate sustained growth, investment, and sufficient employment. In 1994/95, South Africa collected the equivalent of 20.2% of GDP in taxes. By 2024/25, that figure had risen to 25.1%, and preliminary figures for 2025/26 put it at 25.9%. The increase of 5.7 percentage points means that the state now extracts approximately 28.1% more tax revenue from every unit of economic output than it did at the beginning of democracy.

See the three-decade trendline for tax revenue as a share of GDP on the chart below.

Most instructive is that the ratio lifted particularly sharply after 2020, even as real GDP per capita remained well below its 2013 peak; the chart below shows that by comparing the revenue-to-GDP ratio with real per capita GDP since 1994.

This is particularly troubling when considered alongside broader economic trends. Fixed investment has fallen from above 20.0% of GDP in 2008 to below 15.0% in recent years, economic growth per person has stagnated and then declined, and official unemployment has climbed above 30.0%. South Africa has become increasingly effective at extracting revenue from economic activity while becoming progressively less effective at generating new activity. An ever-greater share of a poorly performing economy is being transferred into government coffers; implying the assumption that the state is better at directing spending and infrastructure development than the private sector is.

This is where something called the Laffer curve becomes relevant. Named after American economist Arthur Laffer, the curve describes the relationship between tax rates and the revenue those rates generate. At low rates, tax increases generally raise government revenue. However, as rates rise, taxpayers increasingly change their behaviour. They may work less, invest less, restructure their affairs, shift income abroad, or leave the tax system altogether. Eventually, a point is reached where further increases produce progressively smaller revenue gains. Beyond the revenue-maximising point, raising tax rates actually reduces collections, because the underlying tax base contracts. The precise point differs between countries and taxes, but the principle is that taxation changes economic incentives, with consequences for revenue.

South Africa is particularly exposed because its tax base is exceptionally narrow. Personal income tax accounted for approximately 39.5% of total tax collections in 2024/25, making it the largest revenue source. Yet only a relatively small proportion of South Africans earn sufficient formal income to make substantial contributions. In addition, the highest marginal income tax rate increased from 41.0% to 45.0% in 2017, while inadequate adjustments to tax brackets for inflation have imposed further effective increases. The result is a fiscal system that relies heavily on a comparatively small number of productive individuals and businesses to finance an expanding state.

The international mobility of taxpayers and capital makes this problem especially serious. Skilled professionals can pursue opportunities abroad, entrepreneurs can establish businesses elsewhere, and investors can direct capital towards competing jurisdictions. Taxation is seldom the only consideration, but it becomes increasingly important when electricity costs, infrastructure failures, crime, and regulation already discourage investment. The departure of a successful entrepreneur or skilled professional can deprive South Africa of decades of future tax revenue, investment, and employment opportunities. Such losses may not be immediately visible in annual revenue figures, but their cumulative consequences can be severe.

The significance of this problem has long been understood within the National Treasury itself. In its February 2026 Budget Review, the Treasury acknowledged that high direct taxes can weaken disposable income, consumption, and economic incentives while encouraging avoidance. It recognised that raising tax rates eventually ceases to generate additional revenue and identified economic growth and an expanding tax base as the strongest route to sustainable revenue increases.

When comparing revenue to GDP for South Africa to that of other emerging markets, the evidence is persuasive that South Africa has likely passed the peak of its Laffer curve. See the chart below that tracks revenue to GDP for South Africa versus the emerging-market average. Throughout the past three decades, South Africa’s ratio has run some six to eight percentage points above that average.

How do we get out of the trap?

That’s easy – growth. South Africa’s economy has for a decade been growing at about 25% of the rate of its emerging market peers, and even at below the rate of advanced economies. Lifting growth boosts revenues even if tax rates are cut, which they really should be to sustain that growth. The effect is a virtuous cycle where lower taxes unleash higher growth and expanding government revenues.