Is it time for a wealth tax in South Africa?

Wealth tax has always been a contentious issue in the country, even as South African wealth inequality has remained significantly higher than in France, UK, US, China, Russia and India.

Now that the Covid-19 lockdown and relief measures are having severe impacts on public debt, while reducing expected tax revenues and increasing necessary expenditure, is it time for a wealth tax?

Public debt is likely to spike to hazardous levels and even with the rescue financing, South Africa’s capacity to repay debts needs to be supported, researchers from the Southern Centre for Inequality Studies (SCIS) at Wits University, the Université Catholique de Louvain and the World Inequality Lab at the Paris School of Economics wrote in a paper, proposing a wealth tax to assist with fiscal sustainability, as well as reduce extreme wealth inequality.

Testing alternative tax schedules, they estimated how much additional revenue could be collected from a progressive tax on the top 1% richest South Africans. Their results show that under conservative assumptions, a wealth tax could raise between R70 billion and R160 billion, 1.5% to 3.5% of the South African gross domestic product (GDP).

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Feasibility

The working paper considers the feasibility of implementing a progressive wealth tax to collect additional government revenue and reduce inequality in South Africa, in the wake of the Covid-19 crisis.

In it, the researchers discuss how sensitive their estimates are to assumptions on “mismeasurement” of wealth and tax evasion, and they examine technical issues related to the enforcement of the tax. They also explain how this new tax could interact with other capital related taxes already in place in South Africa and discuss the potential impact on growth.

Why a wealth tax?        

They say that, given the predictions of continued economic depression and retrenchments, it is likely that some relief will need to be expanded or extended, which will further burden the fiscus. In addition, the implication of a forced reduction in production and demand could potentially reduce tax revenues by 32.5% below its pre-crisis level.

“Even with the rescue financing, South Africa’s capacity to repay debts needs to be supported and in this context, a progressive wealth tax, concentrated on those most capable to pay, would be a significant policy tool to finance debt reduction.”

This would help the most vulnerable households and place South Africa in a better position for an economic rebound. They also point out that successful wealth taxation is associated with crises, including drastic economic conditions, conflict and natural disasters and, therefore, a discussion of a wealth tax seems appropriate now.

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They says they also believe that the introduction of a wealth tax should also be considered as an additional policy tool to reduce extreme inequality, citing the most recent available evidence that suggests that, despite the end of the apartheid regime and multiple reforms, wealth inequality has not declined since 1994 and has even increased after the 2008 crisis.

These levels are concerning because they could affect the economy along several dimensions:

• reinforcing the wealthy’s ability to influence members of the institutions
• eroding social cohesion
• strengthening anti-competitive market structures and
• eventually depriving the poorest individuals of endowments needed to resist shocks and realise their full potential.

Rejection

According to the researchers, wealth taxation has too often been rejected on the basis that all associated costs, such as capital flight, administration, or discouragement of effort, would greatly negate the benefits. However, this claim is often grounded on little statistical evidence, mostly due to the lack of data, they say.

The researchers say their paper brings new insights to this debate by estimating how much revenue could be collected from taxing household wealth in South Africa.

“Our intention is not to propose a readily implementable ‘optimal wealth tax’ for South Africa, but rather to present estimates on the potential revenue that could be raised from different tax schedules to inform discussions that would compare a wealth tax to other tax instruments, fiscal consolidation, public expenditure contraction, and the restructuring of public finances.”

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Another expert’s opinion

 Johan Troskie, an independent tax lawyer, read the paper and thinks it is a thought-provoking and valuable contribution to the debate on a possible further wealth tax as there are already several taxes, such as estate duty, transfer duty and arguably dividend tax, that seek to tax wealthy individuals.

He agrees with the paper that there are several intricate issues relating to a further wealth tax which have not been thoroughly researched and discussed and that such research and debate is definitely required before any decision about a further wealth is made. He also supports the suggestion and says he thinks that a rushed, shoddy implementation of a further wealth tax out of sheer desperation is destined to fail dismally.

“I also believe, as the paper points out, this is an important factor which is a downside to a further wealth tax, that South Africans are fed up with additional taxes at a time when there is non-stop to government corruption, mismanaged expenditure, a bloated public service without much to show for it.

“In addition, there is the continued allocation of scarce resources to projects which are doomed to fail, such as the stubborn insistence to capitalise a state airline when history has shown that this government can scarcely manage anything properly.”

Troskie says before any attention is spent on a further wealth tax, government should to come to the party and show South Africans what steps it will take to drastically curb expenditure, otherwise a further wealth tax will be a disastrous failure.

The authors are Aroop Chatterjee (SCIS), Léo Czajka (Université Catholique de Louvain) and Amory Gethin (World Inequality Lab, Paris School of Economics).

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