“So where will the money come from?” OECD secretary-general Angel Gurria asked in Pretoria last week. He listed challenges requiring public and private investment – energy, transport, telecommunications, housing, boosting entrepreneurship, and linking employers to job seekers.

“There are certainly spending efficiencies to be achieved in South Africa. Prioritisation and privatisation are both important. But ultimately, more tax revenues will also be needed to fund investments for a stronger more inclusive economy,” said Gurria, launching the OECD’s fourth Economic Survey of South Africa.

Simply, the report argued, the country’s tax base is too small to meet future spending needs for social and economic transformation and tax reform is a must. In February, Finance Minister Nhlanhla Nene, faced with poor growth and the need to reduce the budget deficit, raised taxes on high and middle-income earners for the first time in 20 years. The OECD proposes more reforms, one of them being that taxes should be again raised for high-income earners.

Tax reforms continue to be a priority while the Davis Tax Commission looks at how the system can support the country’s goals and the state struggles to fund its priorities for transformation. In 2011, Archbishop Desmond Tutu proposed a tax on whites, blending a call for historical reparations to further reconciliation with the need to address inequality, and while it hasn’t received much attention since then, the disgruntlement over inequality and the failure to significantly transform the economy has been prominent with the rise of new political players.

After noting the country’s gains, the OECD report points out that infrastructure projects and initiatives such as National Health Insurance need to be financed, but the budget deficit and growing debt leave no fiscal room to move. “The National Treasury and others, including the [International Monetary Fund], have identified considerable room for improving spending efficiency by reducing waste and corruption. In this environment, the public is reluctant to accept significantly higher taxes. Nonetheless, even with higher spending efficiency, additional revenues will be needed,” the report reads.

For the OECD, that debunks the idea that addressing corruption and wastage will solve the problem and it turns to transforming the narrow tax base, with only 6.5-million individuals paying income tax in 2013/14.

“From a growth perspective, raising revenues through base broadening is preferable to raising marginal rates. In addition, deductions and allowances, such as an allowance for interest income, are often conferred to higher income earners; thus, scaling them back would increase the progressivity of the system. In the 2015 budget, some scaling back is achieved through freezing the interest income allowance in nominal terms.”

It continues: “Further revenue could be raised by reducing the basic tax allowance (lowering the income level for beginning to pay income tax), thereby unwinding some of the tax relief provided by increases in the allowance (and other income brackets) in real terms during the 2000s. The creation of a new first tax bracket with a lower marginal tax rate could also be considered, taking into account concerns about equity and ability to pay, as well as compliance. This could be accompanied by increases in the marginal tax rates on high incomes, which are lower than in many OECD countries despite South Africa’s high inequality.” That means while the OECD does suggest tax increases for the highest income earners, the lowest could also be taxed to raise government income.

Looking at company tax rates, at 28%, the OECD says they are higher than its developed-country member average of 25%, but lower than other emerging countries. To maintain productivity and investment, instead of raising statutory tax rates, it recommends SA should cut many of the tax incentives if a cost-benefit analysis shows they are not effective. Which, it seems likely, many are not.

Looking at value-added tax (VAT), the OECD report says it may need to be raised to finance large spending plans (the Davis Commission has suggested an overview of VAT, but it seems clear that neither personal income nor VAT tax increases will do the job). It also suggests duties on alcohol, tobacco and luxury goods could be raised further. On property taxation, it suggests the state could increase its tax income by first building local municipal capacity.

Alternative Information Development Centre economist Dick Forslund supports a focus on high-income earners. He claims Sars has little more than 5,000 individuals registered with taxable income of more than R5-million, despite reports of high net-worth individuals that indicate the figure should be higher.

“Anti-tax dogma has to give way to reason. The withdrawal of the state from basic responsibilities in favour of tenders and private procurement is a main source of corruption and waste of public money. I would like see someone proposing higher property rates for the mansions of the rich before the local elections next year. This can be a much bigger source of revenue for the municipalities, instead of marks-up on the supply of electricity and water that increase the pile of unpaid household debt,” says Forslund.

He also argues the Davis Commission and state must play closer attention to profit shifting, with $29.1-billion leaving SA in illicit capital outflows in 2012 according to Global Financial Integrity. “An increase of the VAT by the several percentage points now discussed will put another million South Africans below the official food poverty line,” Forslund says.

Professor Theo van der Merwe from Unisa’s economics department says the main focus should be increasing economic growth, leading to higher tax revenue. But black economic empowerment policies, state intervention in the economy, electricity and water shortages, and the government’s recent comments on property rights are hampering investment in the country.

“I do not think there is much scope for personal tax increases after the raise earlier this year. South Africa has a relatively small group of individuals who are paying this tax, while a large number of individuals share in the benefits of government expenditure (social grants, spending on education and medical services, etc.). Economic growth will ensure that the number of personal income tax payers increase due to new employment opportunities, and will also boost the revenue government receive from VAT. In theory an increase in VAT should be considered, because the system has built-in checks and balances. A general tax such as VAT also does not contribute towards economic inefficiencies. From an equity perspective an increase in VAT may not be acceptable, though,” says Van der Merwe.

Professor Jannie Rossouw, head of the University of the Witwatersrand School of Economic and Business Sciences, says that “on the current trajectory we have no option to increase taxes”. What we should be looking at is reducing wastage and expenditure, he says, but Nkandla is like “South Africa’s symbol of wastage for the king of the castle”. He says the country could reduce costs by tackling the bloated public service bill and reducing the size and cost of the cabinet, but there is no political will to face up to the fact that the country is running out of money, meaning that with low growth tax hikes are the only current option to fund development.

Economist Dawie Roodt supports most of the OECD’s ideas on tax reform but was blunt on the issue of tax increases for high-income earners. “The wealthy pay just about all the taxes anyway,” he said, claiming that the tax regime is already very progressive and forcing the wealthy to pay more will do more harm than good, damaging the economy and sending investment elsewhere. South Africa should become more tax-friendly for the wealthy, Roodt says, “Make South Africa the Switzerland of Africa, rather.”

While some of the experts argue, rightly, that tackling wasteful expenditure and increasing growth can lead to an improvement in the fiscus, reducing the need to lay further taxes on both the rich and poor, the reality is more difficult. Advances may have been made in addressing government expenditure, but not enough. And there are no immediate solutions to growth-limiting problems such as electricity shortages and labour strikes.

The National Development Plan, which the OECD report compliments, targets growth rates of 5.7%, far beyond the current economy struggling to push past 2%. If the state wants to continue with its plans, the only option appears likely is the tax hikes. DM