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Better budget planning and less ‘consumptive spending’ will be better.
Taxing the rich even more than they are already taxed comes with the consequence that they may – and often do – emigrate. Picture: Shutterstock
The thing about populist ideas is that they have very little connection to reality. The same goes with the every so often (or very often) call for a wealth tax as the solution to South Africa’s fiscal woes.
The number of rich people continues to shrink because of emigration but also because people are getting ‘poorer’ due to the lack of economic growth and opportunities.
There must be a lot of scrambling going on behind the scenes to put a national budget on the table on Wednesday that will not anger South Africans or impoverish them even more.
The February budget fell flat because of the announcement of a two-percentage point increase in the value-added tax (Vat) rate to 17%.
Recent reports note that there are now talks of a 0.5% increase.
Every time there is a budget there are calls for a wealth tax to save us. Internationally there have also been calls for a minimum global tax of 2% on untaxed global wealth.
It is unclear what goes untaxed in SA. South Africa already employs several wealth-related taxes, besides personal income tax, corporate income tax and Vat.
The wealth taxes in SA include transfer duty, estate duty, donations tax and capital gains tax. However, these contribute only a small portion of total tax revenue, say Jerome Brink and Dylan Greenstone in a Cliffe Dekker Hofmeyr article.
ALSO READ: Budget 2025: Is wealth tax coming for South Africa’s rich?
Everything you own
A wealth tax is typically an annual levy on the total value of your assets, including property, shares, savings, and “even that dusty collection of vintage wine you’re hoarding for retirement”, writes Caoilfhionn van der Walt, tax specialist at Regan van Rooy in Mauritius.
Wealth taxes can be applied on an individual or family basis, usually with some sort of exemption threshold to avoid hammering the middle class. The rates tend to look low on paper – often 1% or 2% – but given that they apply to your entire net worth, they can feel pretty hefty in practice, she adds.
“The appeal of a wealth tax is simple: tax the rich to reduce inequality and raise revenue. In highly unequal societies like South Africa, where the top 1% owns more than half the country’s wealth, it’s an understandably popular idea in political circles.”
Van der Walt says the global evidence that a wealth tax actually works is “underwhelming”.
Only three European countries have some form of a wealth tax, with eight dropping it over the years. They ended up raising far less revenue than expected, while creating a mass exodus of wealthy taxpayers (and their capital) to friendlier shores.
The main reasons for dropping it were challenges with valuations, the high administration cost and the fact that wealthy individuals are not afraid to pack their bags when they feel done-in.
In South Africa people are already carrying a heavy tax burden. The top marginal rate is 45%, capital gains are taxed at 18%, and estate duty stands at 20%. There are sin taxes, sugar taxes and carbon taxes.
“Adding an annual wealth tax on top would be politically popular, but it would likely drive even more capital out of the country, particularly to low-tax jurisdictions like Mauritius and Dubai.”
ALSO READ: Will South Africa’s rich pay wealth tax or find ways to avoid it?
Wealth taxes sound great in theory but have a terrible track record in practice. While South Africa’s inequality crisis makes the idea tempting, the risks of capital flight, administrative complexity, and unintended economic consequences are very real.
Van der Walt says wealthy South Africans should not yet be worried. “But keep an eye open.”
It is well-reported that SA has one of the highest levels of wealth inequality globally. In a 2016 study for the Davis Tax Committee, it was noted that the top 10% of the population owns over 90% of the nation’s wealth.
Brink says the proponents of a wealth tax argue that it could address this disparity by redistributing resources and funding essential public services, such as education, healthcare and infrastructure.
The biggest challenge is going to be coming up with accurate valuations for privately held businesses, intangible assets and unique high-value items such as art and jewellery. There will be a lot of disputes.
ALSO READ: Many wealthy taxpayers are leaving SA due to increasingly high taxes
“The experiences of other countries suggest that a wealth tax is difficult to administer effectively and may not yield the anticipated immediate fiscal benefits, which is the exact purpose of the potential Vat increase and other fiscal considerations by government,” says Brink.
According to Miyelani Holeni, group chief advisor at Ntiyiso Consulting Group, around 38 million people live below the upper-middle-income poverty line. Unemployment remains stubbornly high, fluctuating between 32% and 33.5%.
“Modest GDP growth has limited job-creation impact. A 1% increase in GDP generates only 30 000 to 50 000 new jobs – far too few to absorb a rapidly growing labour force,” he says.
Holeni calls for a reconfiguration of fiscal financing by expanding revenue streams beyond taxes.
He believes it is necessary to shift from “consumptive social spending” to targeted investments in innovation and industrialisation.
This article was republished from Moneyweb. Read the original here.
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