An Elusive Fiscal Social Contract: Three Lessons from South Africa

Abstract

Introduction A common policy concern in developing countries is that inadequate government revenue hampers development. Hence, many countries focus on raising revenue through taxation, assuming governance improvements will follow because taxpayers will demand something in return for their tax payments, i.e. constituting a “fiscal social contract” between taxpayers and the government. Post-Apartheid South Africa has achieved remarkable success in revenue collection. However, despite high tax collection, governance and social indicators have declined. This policy insight explores three possible reasons why a fiscal social contract has not materialized in South Africa. We argue that (1) excessive coercion by the revenue administration undermines voluntary tax compliance; (2) fiscal bargaining is unlikely in a highly unequal society relying on a very narrow base; and (3) unlike in transactional settings, norms-driven societies require different triggers for fiscal accountability.