Wealth tax: Good idea or not?

Judge Dennis Davis, who heads South Africa’s committee on tax reform, said on 21 August that he supported a wealth tax as it was an important symbolic step to address inequality, even though it would raise a relatively small amount of revenue to plug the country’s widening budget deficit.

He acknowledged that the controversy around corruption and state capture make this an awkward moment to take the step, but added that he could not allow “vast swathes of wealth to be immune to tax”.

His remarks indicate that a wealth tax is inevitable, perhaps as soon as next year – but would it really help address inequality and poverty?

When the committee called in April for written submissions on the possible introduction of a wealth tax, it said that the potential forms that would be considered included: a land tax; a national tax on the value of property (over and above municipal rates); and an annual wealth tax, which by definition elsewhere could be levied on cash, deposits, investments, and savings in insurance and pension plans.

SA already has taxes levied on wealth – estate duty, transfer duty, and tax on donations.  

At the same time, those earning the highest incomes in the country were hit with a hefty personal income tax increase this year, and now pay about half of their income in tax.

Against

There are many arguments against a wealth tax. First, its administration is complex and expensive, and will undoubtedly spur capital flight from the country, weakening the rand and fanning inflation – which hits the poor the hardest.

There are only 7.4m taxpayers, who have already been squeezed so much that some analysts believe local taxes are becoming destructive to the country’s tax base, which pays for social grants supporting 17m South Africans.

Eventually there could be a disincentive to become prosperous through saving and investment, and many more wealthy taxpayers who provide the bulk of tax revenues will leave the country.

Global experience has shown that taxes on the value of property will hit pensioners and middle-class households hardest as they may not have the income to meet those requirements, given that the value of their homes would have climbed sharply over the years.

This could lead to widespread sales of property, destabilising the market, or more borrowing, which would lead to higher levels of indebtedness.

One interesting point to make is that according to market research group New World Wealth, at the end of 2016, more than half of SA’s dollar millionaires were from previously disadvantaged backgrounds.

Its figures also show that between 2007 and 2015 the number of white millionaires plunged by 42% while the number of previously disadvantaged millionaires soared by 179%. So the argument that most of the wealthiest people in SA benefitted from apartheid doesn’t really hold water.

Ring-fencing the proceeds of a wealth tax are unlikely to convince everyone as so much of the government’s money is wasted through corruption and inefficiency – according to the Auditor General, there was a 50% increase in “irregular expenditure” in the financial year ended March 2016, mainly because of weak supply chain management.
 
Lastly, a wealth tax will not address the real structural problems responsible for SA’s high rates of unemployment and poverty, and is likely to be seen as a populist ploy to help win votes for the governing ANC in the 2019 election.

In favour

The main argument in favour of a wealth tax – which is a tax on benefits derived solely from asset ownership – is that it is the “right thing to do” as SA is one of the most unequal countries in the world, due to the legacy of apartheid.

According to this year’s inequality report from global charity Oxfam, the total net wealth of three billionaires in the country is equivalent to that held by the bottom 50% of the population, while the richest 1% holds 42% of the wealth.

This is sobering as figures from Statistics SA released in August showed that one in every two South Africans live in poverty, defined as earning less than R1 000 a month.

This works out to 30.4m people in 2015, up from 27.3m in 2011. Yet the value of the country’s household net worth – after debt – amounted to R9.8tr at the end of last year, which is more than twice as much as GDP and well above the R6.01tr held in 2010, according to figures from the Reserve Bank.

There is growing evidence of a negative link between inequality and economic growth, although it is not clear that the one actually causes the other.

Greater inequality stifles spending by lower-income groups, hampers some forms of investment, and fans social instability.

Supporters of a wealth tax argue that if the proceeds were ring-fenced for a particular purpose, it would be more palatable to people who would have to pay it.

Mariam Isa is a freelance journalist who came to SA in 2000 as chief financial correspondent for Reuters news agency after working in the Middle East, the UK and Sweden, covering topics ranging from war to oil, as well as politics and economics. She joined Business Day as economics editor in 2007 and left in 2014 to write on a wider range of subjects for several publications in SA and in the UK. 

This article originally appeared in the 7 September  edition of finweek. Buy and download the magazine here.