The cost of being middle class

Middle-class South Africans are under severe financial pressure. It doesn’t help that, even though they shoulder a hefty tax burden, they’re getting such poor-quality public services that many are paying again — for private security, education and medical care.

The late economist Mike Schüssler estimated that only 18% of SA’s total working-age population pays personal income tax (PIT) — one of the lowest shares in the world. This is because so few adults work in SA (36% against the global average of 54.8%). And of those who do work, few earn above the R91,250 annual threshold at which PIT becomes payable.

It is this small pool of individuals — 7.4-million at last count — that account for more than a third of all tax revenue. Last year, they paid R556bn, making PIT by far the government’s largest revenue spinner.

SA’s annual PIT collections are now equal to 10.4% of GDP. This puts SA in 10th position globally, on a par with Norway, and behind Belgium (11.3%), Italy (10.9%) and Germany (10.6%).

“Basically, one of the world’s smallest middle classes pays the world’s 10th-highest PIT [relative] to GDP,” Schüssler exclaimed. (He defined the middle class extremely broadly, as being everyone in SA who pays tax.)

“As a share of the adult population, less than 20% are liable for personal income tax,” he added. “I know of no other personal income tax-paying country where such a small share of the adult population pays the bulk of all tax income and receives so little in return.”

The FM has done its own back-of-the-envelope calculation of what a hypothetical middle-class family of four may spend on private schooling, medical aid and private security.

Private education

About 700,000 pupils are enrolled in private schools in SA. Roughly half of them attend mid- or high-fee schools, which charge anything from R2,500 to nearly R20,000 a month per child.

Lebogang Montjane, executive director of the Independent Schools Association of Southern Africa (Isasa), says his organisation’s membership growth over the past five years has been largely in the mid-fee and mid- to high-fee segment. Many top-end schools have been hit by emigration and the economic squeeze.

I know of no other personal income tax-paying country where such a small share of the adult population pays the bulk of all tax income and receives so little in return

—  Mike Schüssler

In the past five years, Isasa has added 83 mid-range schools, which charge R25,000-R50,000 a year, bringing its total membership to 887 (up 15% since 2016). That’s in line with quintile 4 and 5 public or government schools, including former model C schools, where fees can be as high as R63,000 a year.

But all this comes at a growing cost.

According to Stats SA, education inflation (which includes the public and private sectors) has averaged 6.2% over the past five years, significantly above the 4.3% of the consumer price index (CPI). Education inflation has been below annual average CPI only once since 2009. 

Private health care and private security

Almost 9-million people in SA belong to medical schemes, up from 6.73-million in 2000.

And they’re paying far more for it. In 2000, the average beneficiary spent just over R1,000 a month on medical aid contributions. This had doubled to about R2,000 a month by 2020, according to the Council for Medical Schemes.

Simplistically, this means a family of four could be spending about R8,000 a month on comprehensive medical cover. (This excludes the R300 the average member pays out of their own pocket each month for medical expenses not covered by their schemes.)

The cost of medical aid has also outstripped the pace of consumer inflation. According to Stats SA, inflation for miscellaneous goods and services insurance (which mainly reflects medical aid cover) has averaged 6.84% over the past five years, against 4.3% for CPI.

According to Fidelity Services spokesperson Charnel Hattingh, the average ADT member pays about R400-R450 a month for armed response and alarm monitoring, though this varies from suburb to suburb.

An extra R15,000-R40,000 a month

To tally it all up, a middle-class family with two children could be paying about R10,000 a month for a mid-range private school or a good government school, but treble that if their children are in a high-fee private school.

Comprehensive medical aid could cost the family about R8,000. They could get away with about half of that for a hospital plan, but then their out-of-pocket medical expenses would be far more than R300 a month.

Private armed response monitoring would add at least R400 a month, or double that, depending on where they live. In an upmarket security estate, levies — which typically include security, maintenance and grounds upkeep — could be about R5,000 a month.

This puts the cost-conscious middle-class family’s monthly expenditure on private education, hospital cover and armed response at about R15,000. A high-income family could be spending R40,000 or more.

That’s a lot, given that the top 10% of SA’s income earners — those bringing home more than R30,000 a month — already pay just under 80% of all personal and payroll taxes in the country.

Those in this group also already spend 20% of their income on taxes, putting SA second only to Tunisia (at 27%) among other developing countries, according to data from the Commitment to Equity Institute at Tulane University in the US.

Still, those in the top 10% aren’t necessarily the ones getting the rawest deal, according to Stellenbosch University economics professor Ingrid Woolard and University of Cape Town researcher Maya Goldman.

In their new research paper, “How Effective is Income Tax in Reducing Inequality in SA?”, Woolard and Goldman estimate that while all salary earners are paying slightly more tax than they used to, this change is greater in percentage terms for the more vulnerable income earners.

This is based on a simulation exercise, which shows that the richest 10% of South Africans’ share of total income rose from 62.7% in 2011 to 64.3% in 2020. The share earned by the remaining 90% of South Africans fell from 37.3% to 35.7% over the same period.

In other words, income inequality in SA is growing and, assuming this holds, SA’s income tax system has become slightly less progressive over time.

The researchers conclude that SA is, therefore, correct to try to make its income tax system more progressive — imposing a higher burden on higher-income earners — even though it is already one of the most progressive in the world.

A hypothetical middle-class family are spending an additional R15,000 or more each month on things their taxes should provide

—  What it means:

“But it also means that this tax cannot be relied upon as a primary tool for countering inequality in the long term,” they write. “The trend in income inequality suggests that the redistributive impact of the tax today will not have sufficient impact on future market levels of inequality.

“We need to find more effective ways of reducing inequality in the longer term, such as reducing our structural skills shortages, and improving our public education system.”

Schüssler feared that the SA taxpayer would not be able to carry the rising burden of higher taxes and an expected increase in government spending. Pushed to the edge, he warned that many more middle-class people would try to emigrate in the next few years.

“SA does not need higher taxes on a smaller middle class,” he said, “but lower taxes on a growing middle class, which will make SA more sustainable.”

In recent years, the National Treasury has, in fact, been cutting spending and resisting tax increases precisely because it fears tax hikes could dampen growth, fuel tax avoidance and lead to further waves of emigration. But at the same time, budget cuts have caused the erosion of government services, including public education and health care, on which lower-income earners entirely depend.

So, as much as the middle class has taken financial strain during the slow-growth period of the past decade, at least it is not at the mercy of failing state institutions. When it comes to tax and spending, it really is all relative.