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Cape Town - There is general discontent among high net worth individuals (HNWIs) in SA who feel they are potentially being unfairly burdened by ever-increasing taxes, due to government needing more tax revenue, but not focusing on expanding the tax base itself, according to Ruaan Van Eeden, managing director of tax and exchange control at Geneva Management Group.
He told Fin24 that one must keep in mind that SA's very small tax base is already being squeezed each year, but without any real impetus on the side of government to try and expand the tax base.
Van Eeden said talk of whether Finance Minister Malusi Gigaba will announce some sort of wealth tax in his first national budget in February is already causing some anxiety among HNWIs - especially since they are not really seeing any benefits from the high taxes they are already paying.
Generally, where wealth taxes have been introduced, they are not successful since they are introduced for political, rather than economic reasons," said Van Eeden.
He explained that high taxes for the wealthy are not in itself the problem. In some countries, like Denmark, the tax rate can even be up to 60%. However, in return these taxpayers get to live in a society with political stability, safety and good medical care being provided.
"In SA, by contrast, you have a large welfare state supported by HNWIs. The [tax] pressure on HNWIs is increasing each year, but without them seeing any real benefit from it," said Van Eeden.
One way government could target the rich in the national budget would be to increase capital gains tax (CGT) as a form of wealth tax.
"In anticipation, many HNWIs are looking at how they can get their money out of SA legally - by emigrating or by means of financial structures to reduce the impact of estate taxes, CGT and an effective tax rate of over 40%," said Van Eeden.
He warned that such an increased exit of capital from SA will reduce the tax base even further. SA is one of the top 20 highest overall tax-to-GDP countries in the world.
Currently the maximum tax rate in SA is 45% and applies to those who earn over R1.5m a year. The effective capital gains tax rate of 18% on emigrating, therefore, appears to be a price worth paying for HNWIs in the current environment.
"Government has a delicate balancing act to do in Budget 2018. Instead of targeting HNWIs, who already carry the bulk of tax in SA, the government should rather bolster economic growth and hike the value added tax (VAT) rate. VAT in SA is relatively low compared to averages in Africa and the rest of the world," suggested Van Eeden.
"The risk of introducing an additional form of wealth tax would be more capital fleeing SA - something the country cannot afford, as those HNWIs contribute the bulk of taxes being paid currently."
Van Eeded accepts that, because of historic inequalities in SA, a type of wealth tax is needed and should remain. In his view, however, government should not pile more taxes on HWNIs at this stage.
"If the purpose behind higher taxation of the wealthy is to address inequality, this should be thought through with care. An analysis of the underlying causes of the inequality is crucial, because that approach will determine whether the solution lies in taxation of one group in society to benefit others," he said.
"In SA, there clearly is a need for more people to become economically engaged and so to increase prosperity among a wider group of citizens. This will automatically increase the tax revenue in the country. But the means of reaching this goal cannot rest only with the higher taxation of HNWIs. Other ways of stimulating prosperity must be applied."
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