Paper short abstract:

We use this paper to demonstrate how financialisation in South Africa adversely impacts democratic processes by concentrating the tax burden on fewer tax payers who rely less on social redistribution, thus damaging the social contract. We show the wider impact this damage has on public finances.

Paper long abstract:

There is an emergent literature on the adverse impact that financialisation has on democratic processes. This paper focuses on the consequences of financialisation for taxation and public finances. We bring together literature on the political economy of tax and state financialisation, arguing that financialisation exacerbates trends in modern capitalism which undermine democratic cohesion by delegitimizing taxation and tax collection. South Africa serves as our illustrative case study. The country is one of the most severely financialised societies among its emerging economies (EEs) peers. In line with broader neoliberal trends, company tax has declined severely as source of tax revenue for the state which increasingly has to rely on personal income tax for revenue generation. As consequence of financialisation, the labour market has transformed fundamentally over the past 20 years in the country. The vast majority of jobs is created by the tertiary sector and mainly finance and government employment, while many manufacturing jobs have been lost. This results in income polarization which means that the bulk of the personal income tax take is raised through taxing finance professionals and government employees. These professional groups often opt out of social provision, relying on private health care and pay-for infrastructure, more broadly. As consequence, there is a growing resentment amongst these groups towards taxation, which undermines the ability of the state to provide inclusive social provision.