Business 2.5.2017 02:15 pm

The price of a wealth tax in South Africa

Tax. File photo

Tax. File photo

Annual wealth tax on trusts would ‘tie in’ with the tax system.

The hotly-debated issue of a wealth tax for South Africa’s already overburdened taxpayers is squarely in the limelight with the invitation from the Davis Tax Committee (DTC) for public submissions on the desirability and feasibility of such a tax.

Read: Public debate on possible wealth tax launched

French economist Thomas Piketty aroused the idea of a wealth tax in his book Capital in the Twenty-First Century, and his philosophies have been widely quoted by DTC chair Dennis Davis.

The proposed forms such a tax may take in South Africa include a land tax, potentially just a tax on agricultural land, or land over a particular size, a national tax on the value of property (over and above municipal rates) and an annual wealth tax, basically an estate duty payable every year, not just at death.

The deadline for submission is the end of this month and a group of concerned tax and wealth professionals have already begun research and drafting submissions on this issue.

Keith Engel, CEO of the South African Institute of Tax Professionals, says these taxes would represent an additional charge on middle class and wealthier persons, depending on the threshold.

“All three (proposed) taxes are annual wealth taxes. The net result is another tax increase,” he says.

“Many people are now paying more than 50% of their income in tax once VAT and other indirect charges are being taken into account. A hefty new tax could be a breaking point for many.”

Given the huge amount of research required to determine the effect of a wealth tax the concerned tax group will be asking for an extension, says Dan Foster, tax director at law firm Webber Wentzel.

He says wealth taxes are not necessarily meant to raise lots of revenue, but are a form of social engineering.

“However, for the people that have to pay, it is quite painful. Bear in mind that it will be the middle class who will suffer, as with all taxes.”

Read: Tax revolt: The frustration is growing

Foster, vice chair of Sait’s personal tax working group, refers to several international tax and economic commentators who have already done studies on the positive and negative effects of wealth taxes, and who have done calculations based on the Piketty proposals.

It does show that the revenue gains are not that spectacular, but it seems words like “fairness, equity and sacrifices” form part of the international debate.

Chris Evans, professor of taxation at the University of New South Wales, notes in his 2013 briefing paper on the problems and practice relating to wealth taxes around the world that the member countries of the Organisation of Economic Cooperation and Development (OECD) are among the richest countries in the world.

However, the combined tax revenue of these countries, derived from annual wealth taxes and wealth transfer taxes accounted, on average, for less than 1% of their total tax revenue.

Evans says wealth taxes have steadily declined in recent decades. In 1990 exactly half of the OECD countries had such taxes. By 2000 the proportion was just over one third. And by 2010 such taxes only existed, on an ongoing basis, in France, Norway and Switzerland (at the cantonal level).

Michael Schuyler, a fellow at the US Tax Foundation, compiled a special report in 2014 by using the foundation’s taxes and growth model to determine the outcome of Piketty’s recommended wealth tax.

The basic version of Piketty’s wealth tax would impose a tax rate of 1% on net worth of $1.3 million and $6.5 million and 2% on net worth above $6.5 million. Piketty contemplates additional tax brackets, including a bracket of 0.5% starting at about $260 000.

“Piketty’s claim of fairness is subjective and of prosperity is surely wrong … The Tax Foundation model estimates that the Gross Domestic Product (GDP) loss, expressed in terms of the 2013 economy, would be about $800 billion annually under a two-tier wealth tax of 1% and 2%.”

Schuyler found the estimated loss would rise to about $1 trillion annually if a half-percent bracket on smaller wealth holders ($260 000) were also imposed.

A wealth tax (Piketty style) in the US would depress the capital stock by 13.3%, decrease wages by 4.2%, eliminate 886 400 jobs, and reduce GDP by 4.9%, or about $800 billion.

All for a revenue gain of less than $20 billion, the Schuyler’s modelling exercise found. If the slightly wealthy are also included the GDP loss goes to $1 trillion for a revenue gain of slightly more than $62 billion.

Patrick Stevens, former president of the UK’s Chartered Institute of Taxation, writes in an article – published in 2012 by politics.co.uk – there are several obstacles to administrating a wealth tax.

Someone with a £2 million house may seem well-off but if they are on a low fixed income, as many pensioners will be, finding the money for a £10 000 annual charge (which is what a 0.5% levy would correspond to) may present a huge challenge.

“There is a reason why most taxing of wealth currently takes place at the point it is being transferred –because it is easier then to skim off a portion of the proceeds of a sale,” Stevens says.

Patricia Williams, tax partner at Bowmans and Sait member, says there is an alarming trend in South Africa to seek out implementing multiple alternative tax types.

“They are complex and administratively burdensome to comply with. They are without a cogent overall framework and sensible manner of applying the funds linked to the purported purpose of the tax. That is a key threat with these further tax proposals,” she warns.

Williams proposes an annual wealth tax on trusts, as an alternative to estate duty, would make sense and “tie in” with the rest of the South African tax system.

She explains that trusts escape estate duty, so an annual tax of, around 0.5% would be equivalent to a duty of 25% every 50 years.

Some of the complications associated with the introduction of a wealth tax include the valuation of assets to determine net worth, what should be included and what should be excluded from determining the net worth and the rate of the tax on the determined threshold.

Thomas McDonnell, senior economist at the Nevin Economic Research Institute in Ireland, says in a 2013 working paper wealth taxes, at least as enacted in Europe, have generally been “incoherently designed” and “incapable of achieving their core objectives”.

A well-designed wealth tax should be related to the ability to pay, should seek to minimise economic distortions, and should be as simple as possible.

“Resisting the inevitable clamour and special pleading of interest groups for exemptions and reliefs will be a constant challenge for policymakers. Yet a viable wealth tax needs to have an acceptable cost yield ratio with low compliance and administration costs,” McDonnell notes.

Foster is weary of additional taxes in South Africa. “Ultimately, South Africa, like all developing countries, needs more growth and not more taxes.”

Taxes lead to wealth destruction, low investment, low returns and low growth and lower taxes collections.

He quotes Winston Churchill who said, “I contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle”.

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