Optional non-filing and tax over-withholding: Evidence from South Africa

Tax withholding in Pay-As-You-Earn systems is common across developing countries and considered essential for the effective enforcement of personal income taxation. To limit administrative burdens, Pay-As-You-Earn is often coupled with generous tax non-filing options. Drawing on rich tax administrative data for South Africa, we show that such Pay-As-You-Earn systems are associated with sizeable and non-refunded over-withholding of taxes, raising taxpayers' effective tax rates above legally applicable rates. Vulnerable taxpayer groups---low-income workers, young taxpayers and individuals who recently entered the formal labour market---are disproportionately affected. Pay-As-You-Earn over-withholding can deter formal labour supply and impair the progressivity of the personal income tax schedule.