The current tax policy in South Africa creates a significant disparity that reinforces inequality. While labour income is taxed at rates up to 45%, dividend income—a primary source of revenue for the wealthiest 10%—is taxed at a flat rate of only 20%. This report argues that eliminating this preferential tax treatment is crucial for creating a fairer economic landscape. By taxing dividend income at the recipient’s marginal tax rate, similar to wages, we could generate an estimated R17.5 billion in additional revenue. This amount could effectively double the national budget for labour affairs and work programmes. It is time to move beyond policy choices that benefit only a few and prioritise a system that values all forms of income equally.
What We Recommend
- Tax all local and foreign dividend income received by residents as part of their normal income (under PIT for individuals, at 45% for trusts) rather than at a flat preferential rate. This means dividend income is taxed at the recipient’s marginal rate, just like their salary or business income. We estimate that this would raise an additional R17.5 billion. This is a significant amount, enough to double the national budget for labour affairs and works programme (R13.2 billion), for example.
- To protect compliance, the current withholding mechanism (where the distributing entity deducts the tax at source) should be retained. The current 20% rate would become a floor; those with higher effective income tax rates would pay the additional amount directly to SARS.
Common Objection: Won’t this hurt investment and job creation?
Some argue that lower taxes on dividends actually encourage companies to pay out profits to shareholders rather than reinvest them. Therefore, a higher dividend tax could incentivise more productive investment by companies through retained profits used for operational expansion and workforce growth.
This positive effect, however, is only possible if a higher dividends tax rate does not simultaneously discourage savings from being invested into equity in the first place. Higher dividend tax rates can also be beneficial in this regard. Policy could be designed with differential dividend rates to specifically encourage investment in productive, labour-intensive industries, while disincentivising investment in sectors like finance, insurance, and real estate, that cause financialisation of the economy and provide little prospects in terms of large-scale job creation for South Africans. Read the full report below.
