By Jashwin Baijoo
With discussions on imposing a wealth tax being rife in preceding years, policy makers are turning to the South African Revenue Service (SARS) to look into the feasibility of this new proposed tax, to bridge the “widest wealth gap in the world”.
This was seen this past weekend during the National Policy Conference (the Conference), where a wealth tax was tabled as the preferred option to fund the basic income grant.
Do the means justify the ends?
While the idea of a wealth tax was initially tabled years ago, it became a topic of wide discussion upon release of the wealth tax report by the Davis Tax Committee in March 2018.
Fast forward to the 2022 Conference, and chair of the ANC’s economic transformation subcommittee stated that “The majority of the wealth of this country is in the hands of 5% of the population. That’s not right. We’ll have to have SARS look into (a wealth tax)”.
This statement, aimed at the wealth equalisation in South Africa, of which it appears step one is the permanent implementation of the basic income grant, as was used during the COVID-19 pandemic, is supported by a study conducted by the University of Witwatersrand. In the study, titled “Coronavirus: why South Africa needs a wealth tax now”, it was speculated that “a wealth tax on the richest 354 000 individuals could raise at least R143 billion”.
This may sound like an astronomical number, but it is just the tip of the iceberg for the funds needed to even remotely start the wealth equalisation process in South Africa.
Rise in Emigration on the Cards
One point of concern on the proposed wealth tax, is the exodus of the “High Net Worth Individuals”, who would be the subject of such tax, if imposed. The Bureau of Economic Research (“the Bureau”) has stated the implementation of a wealth tax, may see shrinkage of an already small tax base in South Africa, with these wealthy individuals, emigrating in favour of a lower tax jurisdiction.
The Bureau goes further, as supported by a number of independent economists and recent Intellidex reports, raising the concern that should a wealth tax be implemented, it would be done so at a high effective tax rate, due to the pool of individuals who qualify, being so small.
Granted the idea of a wealth tax, is the adjust the financial inequalities in South Africa, it is human nature to do what is best for oneself. This includes protecting hard earned money, against a tax, which can be construed almost as punitive in nature, or at least, more punitive than the current bracket system of taxation in South Africa.
The Davis Tax Committee’s Balancing Act
In its final report of the feasibility of a proposed wealth tax, the Davis Tax Committee, confirmed, by empirical evidence, that the wealth inequality in South Africa is higher than even global wealth inequality.
It is noteworthy that mention was made of the adverse impacts of imposing a wealth tax, stating “The adverse consequences of wealth taxation such as capital migration, disincentives to save, the effect on entrepreneurship and employment must be thoroughly considered”. This would have a large impact on the already small South African tax base, with a knock-on impact of an increased unemployment rate for unskilled labourers, and some professionals, sector dependant.
It has been suggested by the Davis Tax Committee, that although the purpose behind the proposed net wealth tax is admirable, long-term sustainability must be considered. This indicates that the proposed tax system must be designed in such a way to not be deemed prohibitive on wealthy individuals, and not exacerbate emigration rates in any way.
This will allow the proposed system, in the long run, to generate more revenue, than the costs to administer it.
The Way Forward
Although some studies do show an ever-widening wealth gap in South Africa, and empirical evidence confirming that South Africa has a wealth inequality higher than even the global wealth inequality, the country’s tax base can stand no further shrinkage.
A wealth tax may be for the greater good, but the implementation, must follow a staged, and calculated approach, to promote retention of contributing taxpayers, and stem the flow of emigration in favour of more digestible taxation.
It must be borne in mind, from a perspective of sustainability, and as per the Davis Tax Committee, “Wealth taxes are merely one tool, amongst many, with which to address the pressing problem of inequality” and should not be relied on in isolation.
Jashwin Baijoo is a Legal Manager in Africa Tax and Compliance at Tax Consulting South Africa
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