What a wealth tax could look like

A wealth tax, if introduced, is not expected to add more than R5 billion to state coffers.

This is a drop in the bucket compared to government’s consolidated revenue target of R1 324 billion for 2016/17, but presumably more politically palatable than the estimated R15 billion to R20 billion a one percentage point increase in the VAT rate would raise.

As government struggles to make ends meet and amid efforts to reduce inequality in South Africa, the idea of a wealth tax re-emerged after French economist Thomas Piketty mooted the idea during a visit to the country.

The Davis Tax Committee (DTC) is in the early stages of its wealth tax review and is expected to release its findings by the first quarter of 2017.

Judge Dennis Davis, who heads up the DTC, says some options include an annual tax on wealth, re-examining a land tax or reinforcing the Estate Duty Act.

Estate duty is regarded as a wealth tax, but the DTC rejects the notion that capital gains tax is also a wealth tax.

“Capital gains tax is just tax on deferred income. It is not a wealth tax,” Davis says.

While proposals around a wealth tax will likely re-ignite concerns around South Africa’s small tax base, there are also other issues to ponder.

Davis says the institutional design of a wealth tax is quite complicated and has to consider the administrative cost and potential for revenue collection. Comparative wealth taxes around the world do not produce huge sums of money.

“In the South African context I would be extremely surprised if a wealth tax brought in more than R5 billion a year.”

While a wealth tax would be aimed at very affluent South Africans and not at an overburdened middle class, it is unclear where the line would be drawn.

Although the committee is concerned about overtaxing wealthy individuals, it is more worried about overtaxing people who can’t afford to pay tax.

“You cannot run a society like ours – you just simply can’t – without understanding that given our history people who really are extremely wealthy need to pay an additional sum of money in order that we attain social stability and decrease inequality. It is absolutely clear to me that that must be the case and that is why certain kinds of taxes like an estate duty seem to me to be the least interfering.”

“Why should the next generation simply perpetuate the advantage of the previous generation without any penalty?”

While some wealthy individuals are notoriously greedy and don’t want to pay additional taxes, there are also a number of people who would be willing to pay more if they knew the money would go directly to the sources of need and would not go to waste as a result of inadequate procurement or corruption, Davis says.

But how likely is the introduction of a wealth tax?

Michael Honiball, director at Werksmans Attorneys, expects a wealth tax to be introduced in future.

“South Africa has a socialist government and there is a large discrepancy between the rich and the poor, and the rich can afford it if the percentage is not too high and if it kicks in at a high enough threshold.”

While South Africa’s tax base is small in relation to income tax, there are many people who have a low income, but significant assets – if the rate is low enough, they would be able to afford it, he says.

If the rate of a wealth tax is low, for example 0.5% of all assets on a net asset value basis (in other words, after any debt was deducted), starting with anyone with over R30 million in total assets (R30 million is the level at which the DTC proposed the estate duty rate should increase from 20% to 25%), South Africa can afford to introduce a wealth tax, Honiball argues.

Muneer Hassan, senior tax lecturer at the University of Johannesburg, also expects a wealth tax to be introduced.

“The Minister already indicated in the 2016 budget that we will require additional taxes of around R15 billion over the next few years.”

Hassan says South Africa already has wealth taxes in the form of donations tax and estate duty. South Africa has a small tax base and its tax-to-GDP ratio is increasing. With a small tax base the options available to increase revenue collections within the context of limited growth are few.

Andrew Wellsted, director at Norton Rose Fulbright, does not expect a wealth tax to be introduced.

South Africa has several forms of wealth taxes in place already, he says.

These include a progressive income tax system, capital gains tax (a tax on invested capital which ordinarily applies only to the wealthy) and estate duty. A further specific wealth tax would place additional, unsustainable pressure on taxpayers already subject to these taxes, he argues.

“South Africa’s tax base is too small to constantly increase tax rates or introduce new taxes as the fiscus requires additional funds. There may well be significant negative implications arising as new taxes are applied to an already highly-taxed tax base. It has been shown in numerous studies that increasing tax rates beyond a certain threshold can have the effect of reducing tax collection overall and this should be borne in mind.”

The wealthy can afford to invest in structures that minimise taxes, and they will do so if they feel that they are being taxed excessively, Wellsted adds.

These issues are exacerbated by the Treasury’s practice of introducing “new” taxes to fund pressing social programmes. This includes the “sugar tax” and the proposed funding of the National Health Insurance among others, he says.

“It becomes untenable to levy further taxes when the tax base is so severely taxed under numerous different tax laws.”

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