Raising revenue through a wealth tax is clutching at straws

Diverting attention away from unsolvable issues.
South Africa already has considerable ‘wealth taxes’. Tightening the screws will, in the author’s view, make investments in tax avoidance schemes more attractive. Image: Shutterstock

These are bad times. The government is promising capital before it has managed to raise it, the South African Revenue Service (Sars) is struggling, and the economy is in lockdown. Additional funds are desperately needed.

Placing the wealthy – the apparent 10% – in the spotlight is a tried and tested tactic to divert the attention away from unsolvable issues.

Sadly, there are no research papers on the untaxed illegal earnings of the tobacco smugglers, the money launderers, the criminals who benefitted from state capture, and the rest of the motley crew of helpers.

Therefore, unsurprisingly, the wealth tax has resurfaced.

Read:
South Africa to weigh a wealth tax to aid recovery, Rapport says
Coronavirus: Why South Africa needs a wealth tax now

What is wealth?

There is a misconception that ‘wealth’ is not only fungible, but that it has an ascertainable exact value at a point in time, and that the value increases over time.

No thought is given to any clawback of any wealth taxes paid if the value of wealth decreases.

One research paper I looked at did mention the capitalisation of income streams in the calculation of wealth. Most accountants would roll their eyes at this (so many debatable assumptions).

An acceptable equation for wealth is that it equals the sum of the value all assets, including intangibles, less debt.

But how is value defined? At a point in time? The increase from one point to another? What about a decrease? Historical cost, fair value or market value? How does one place a market/fair value on a house in an illiquid market? How does one ascertain the market/fair value of a share in a privately held company? (It may not be possible to sell the share, and there is no right to a dividend).

Would an economist, an accountant, and a tax lawyer be able to agree on a definition of value, or on the definition of wealth, for the purposes of a wealth tax?

The valuation of assets becomes more complicated when an intangible asset is included. There is no agreed methodology for the valuation of an intangible asset.

An accountant, a patent attorney, and a tax official walk into a bar … And the tax lawyers look forward to settling the argument in court. And let us not forget the expert witnesses, each one defending a differing valuation.

Tax authorities busy enough as it is

The increasing number of transfer pricing cases between tax authorities and taxpayers around the world are an indication of the difficulties faced in valuing purchases and sales between connected parties.

And now a tax authority must grapple with putting a price tag, and a taxable value, on a person’s wealth? Where there is no starting point of an arm’s length price for comparative purposes as in transfer pricing?

(Researchers seem to think that all assets have an ascertainable market value).

Sars will no doubt grapple with unpacking basic wealth structures, never mind the valuation of intellectual property, and locating wealth that has been ferreted away in blind trusts and shell companies around the world.

It was for good reason that Sars introduced the successful special dispensation for the declaration of offshore assets – the voluntary disclosure programme (VDP) – in October 2012, to persuade residents to declare their offshore assets and income.

Offshore assets add further complexity. How would the calculation of wealth at a point in time deal with foreign exchange rates? At the spot rate, at the hedged rate? And how would the ‘growth’ in ‘offshore wealth’ be calculated?

Before taking a blind stab at this, attempt to decipher the wording of Section 24I of the Income Tax Act (foreign exchange gains and losses), and study some of the cases that have been considered by the courts. A recent tax case that turned on the interpretation of this section, which the judge said was badly drafted, may be appealed to the Constitutional Court.

The drafting of the legislation to bring in a wealth tax may well be the straw that breaks the camel’s back.

Wealth taxes

The Davis Tax Committee, in its report for the minister of finance in 2018, the Feasibility of a Wealth Tax in South Africa, notes that South Africa already has “wealth taxes in the form of transfer duty, estate duty and donations tax”.

“The growth in investments is taxed, interest is taxed as it is earned, and drawing down from a retirement/pension fund is taxed (portion of which includes growth)”.

Dividends are taxed when paid. Capital gains tax or income tax is paid on the profits made on, for example, selling an investment, property, or capital asset.

Further, home owners and land owners already pay rates and taxes on the property valuation (and these valuations are often disputed).

Would including property in a wealth tax not amount to a double tax?

The government has previously clawed back or levied taxes. One example is the transitional levy of 5% payable on taxable income by all companies in 1995, before the deduction of any assessed loss brought forward. This was therefore beyond an ‘income tax’. Another example: in 2002 the government expropriated all privately held mineral rights, and now charges a royalty to the licence holder.

It is generally agreed that there is an optimal level of taxes that will be paid by taxpayers, and that higher taxes will lead to a reduction in taxes collected (this is referred to as the Laffer curve).

South Africa may well have reached that point. In today’s environment, it would not be unrealistic to speculate that there is a ‘gatvol level’.

In my view, higher taxes will make the investment in tax avoidance schemes more attractive. Add to this a liquidity shortage and high interest rates, and one has the perfect environment for tax avoidance. Without providing more details, Sars can work this out and add it to their ‘risk engine’.

Read: Taxpayers keep paying the price for policy inaction

The government has not managed to collect and redistribute wealth to its poor in an honest, transparent and efficient manner while providing the requisite infrastructure for the provision of water, homes, electricity and education. But this has more to do with ineptitude, internal corruption, state capture, mismanagement of state-owned entities (SOEs), and SOEs blatantly squandering capital than the wealthy citizens not paying their fair share of taxes.

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Wealthy?

Which wealthy, where?

If most haven’t left post Covid, they surely have plans too !

Those staying behind were wealthy until Lockdown destroyed an economy and a ruling party plunged a country into a depression leaving millions jobless

You are only wealthy if you have consumers to buy your product or service.

With the racist Government denying white owned SMME’s assistance, they will unfortunately be the ones retrenching the very people that vote for the ANC..

The average SMME employs at least 10 ANC voters, or should i say DID!!

The ANC have managed to rape loot and destroy what was once the Jewel of Africa!

A Rainbow Nation decimated by greedy, ruthless cadre’s ..Evil personified

THEANC made the rainbow B&W and smoked zoll with the freedom charter.

Your point on retrenching is just a win/win for the ANC. After all the retrenchments, it just strengthens their usual “WMC” rhetoric and their case for continuing bailing out SOEs and (insert moneyweb approved term for take what is not yours) land and possessions. That will lead to more votes because nobody else has a track record of reducing others’ wealth.

We don’t need a wealth tax. What we need is an open growing economy that creates jobs.

We need a government that actively supports the Business Gems that have been able to survive the South Africa economic environment.

The growing base will support more tax revenue that government can use to distribute and develop skills throughout the country.

We need an environment that supports risk-takers and entrepreneurs to build the businesses of tomorrow. These businesses don’t come from government. Government must create policy to support this.

Good article; many points raised about practical issues! Emphasis on the existing wealth taxes that are not actually making the poor richer (or happier)…

“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.” – Winston S. Churchill

Agree, good article. Looking at it simplistically, I note that SARS itself last year divulged the fact that ‘97% of its taxes are paid by fewer than 3 million South Africans.’ (Out of 57 million people.) These hardy few are already over-taxed to the hilt, carrying the whole burden of the inept and corrupt ANC’s total expenditure. You can’t get blood out of a stone. And this stone has already been squeezed dry.

A very good counter-argument by Barbs. The ability of the regime to raise more money through taxation is severely limited. Capital gains is a wealth tax through which the regime utilises a process of currency debasement. Gains, in this case, are not real, they are nominal, measured in debased currency. Barbs talks about capitalisation of income streams. The greatest Austrian economist of them all, Antal Fekete has treatises on the subject and how these are affected by interest rate manipulation and currency debasement.

Wealth is something you create by adding value. For example planting seed cord + land + rain = mielies of far greater value. Taking planks and woodworking equipment making furniture. Writing software, curing diseases, analysing data into information, transport services, digging minerals, selling items produced elsewhere in supermarkets. Wealth creating can be measured by the value added. This is shared between labour, shareholders and the regime (tax) My mate Jerry S. has written treatises on this on MW. We know that wealth is accumulated via a process of spending less than you earn, be it a company or an individual. This wealth is normally invested to create more wealth. Massive wealth accumulation betters out lives. Even if it is invested in bonds this releases capital to be invested in plant and equipment or whatever is required for further wealth creation. Wealth is our seed corn in life.

The shameful thing is that the disgraceful article in the Conversation suggests we steal the seed corn by force or threat of force and use this for current expenditure.

An article like was published int eh conversation is the greatest incentive on earth to externalise your capital and yourself if at all possible. Those externalising themselves will not be the penniless Congolese illegal immigrants with six kids but those with marketable skills. Those who create wealth. A South African has a value that is determined by their net assets plus their future earnings (capitalised). The ANC can steal the former but a simple process of emigrating to a country where your skills are welcomed and you are not subject to racial discrimination puts the latter out of reach of the avaricious ANC plunderers.

The fact that this was published in “The Conversation” speaks volumes about this publication that will not publish any alternative views, no matter how well researched or how well documented, about CO2 and catastrophic global warming. I routinely attack this vile excuse for a publication and get censored by MW so I shall refrain. MW has been hijacked by far left journalism. Such a shame.

Every road leads to a destination. If one keeps on travelling south on the N1, you will inevitably reach Cape Town. We are passengers on this overloaded ANC taxi on this road of socialism and communism that is full of potholes and stray animals.

Those of us who can read a map can identify the destination. This road goes downhill and the destination is Harare, Caracas, Buenos Aires, Brazilia and Sucre. The destination cannot feed everybody on the taxi. Hungry and sick people are fleeing on foot from those cities, looking for food and medicine, while we are still on our way there.

Our destination, under ANC rule, can only accommodate roughly 20 million people. What will happen to the rest? Where will they go? Those who are too old or sick to travel north, searching for jobs in Zimbabwe, will go to the local graveyards.

“There is nothing new in the world except the history you do not know.”- Harry S Truman.

Super article. Not to mention where the markets stand at the moment.

Most wealth is not held in the form of cash, but in property, shares, or other illiquid assets.

A fire sale of assets to pay the wealth tax would be a death blow to the property market for starters and would just such more money out of the productive sector to give to a wastryl government. A very bad idea.

Government would do us all a service if, instead of going into the collective panic of a lockdown, it stopped burning the economy down to the ground to avert at queue at few hospitals

Far cheaper to build a few more facilities and have them left over to better serve the public after covid-19.

But rational thinking had never been our strong suit.

There is simply not enough rich people in this country to make a wealth tax feasible. Secondly, the super-rich simply lives from their dividends because a 20% tax rate is a lot lower than 45%. The wealth tax is just smoke and mirrors and therefore politics.

I have certainly now reached my GATBOK level, and will do everything I can do get funds and assets offshore and to limit my SA tax exposure.

You’re still an sa tax resident and would be subject to a wealth tax in that scenario.
The top 10% wealthy are your moneyweb readers.

Perhaps the ordinary unconnected wealthy tax payer is the last to know that this Wealth tax is already in the pipeline! It would explain why the connected ( Oppenheimers, Motsepes, Ruperts et al) have already made their donations through their foundations up front to the Solidarity Fund.
It sounds like the plan will be for a one-off Wealth tax payment to the Solidarity Fund shortly…. weather you like it or not.
And Ms Curson is right….much easier to claim from those already contributing, than those crooks and fraudsters who have got away with their untaxed ill-gotten gains. Punish the honest citizen, reward the scum. Sis!

Playbook:

Publish contentious article from The Conversation.

When said article racks up the clicks, publish a rebuttal.

Rack up more clicks.

Thankfully, I haven’t been a subscriber for a while now.

Now in the time of COVID19 ones income is down 50% +, And the value of your house is 35% down from 2019.

Council insisted on % based charge relative to the value of property!

Is the city council going to decrease the rates and taxes charged monthly by re rating down by 35% from next month.

We’re are the rebates for 36 months,being fair and equitable??

What’s the chance a council/government official has the mental ability to comprehend that wealth is a moment in time its fluid not perpetual and yes it goes up & down.

Yep – Property taxes are highly progressive and not listed amongst the wealth taxes above.
Each high value house in a costly suburb paying the effective utilities and municipal services of many households in suburbs with properties below rateable value.
Your 35% down argument doesn’t work under current procedures though – it would only apply if your property was down 35% relative to others. At each revaluation, municipalities simply adjust the rate in the rand so that their total take is increased by around CPI or more. So if all properties are down 35% the rate in the rand will go up 40% or thereabouts and you still pay the same.

There is effectively no difference between a burglar and someone who advocates the implementation of a wealth. Where the burglar works hard and takes many risks to use a crowbar to break into your house to steal your valuable possessions, the socialist use the legislature as a crowbar to break into your house to steal your valuable possessions. Both of these criminals use leverage to gain entry.

The common criminal steals once and runs the risk of going to jail, while the socialist use that crowbar in perpetuity, until all your assets are gone, and then gets a seat in parliament.

i swear, one more tax and im out of here

Start with billionaires cyril and patrice , then recover the billions you gave to the guptas.

Don’t forget Tokyo, he has been very quiet after quickly exiting his Gupta associations.

An excellent summation of yet another inept attempt to run this country but actually run it into the ground.

There is talk of property assets being included in a basket of “wealth” to be taxed over R3.5m. So a retired person has an unbonded property rated by the municipality at R5m which was purchased twenty years ago for R1m and was assiduously maintained, remodelled and paid off.

That retired person has a limited income based on fluctuating investments and a minimal retirement amount. She is still taxed in the many ways mentioned in the article, yet now she will be taxed on a bundle of assets which includes the fixed asset of the property which would only return an income if rented or sold; in which case she would now have to find a rental property and have her total income reduced.

Is it her fault that the ANC State has been incapable of creating environments for capital to be used in the economy in creating jobs? Is it her fault that the SOE’s have milked the treasury? Is it her fault that the unions have destroyed impetus to employ new staff? Is it her fault that the bloated state workforce delivers minimum production for maximum salary?

It would seem so. If this goes ahead, I predict a collapse of the property market and a flight of capital like never seen.in before.

For once in my investing life, I am investigating Bitcoin …

Once again the clowns have cocked it up. If you think of the logical answer the ANC will do exactly the opposite.

we went into lock down, fine that was to give us a breather to plan ahead. what happened? 5 Weeks after lock down we still have ministers who have no plans, they appear on TV but will announce plans next week or in a few days time. They were obviously just sitting on their fat xxxrses doing nothing.

Simple solution, 1) Social distancing, 2) if you cannot distance wear your mask. get out there and start the economies engine, more will die of starvation, depression or suicide than from the flu.

These goons are using this as an election tool, watch next year the slogans will be We saved your life, we fed you, you are so lucky to have the ANC. And 30 million purposely uneducated people will vote them in again.

don’t come to me for wealth taxes or any demand for extra money. I paid my taxes, a lot, if some slimeball has stolen it so be it. That slimeball stole from their own poor people, I hope he/she feels good.

What did Isaac Newton say? “For every action their is a reaction.” Life has a way of paying you back, ANC beware that time is very close.

Gov have just passed up a major opportunity – why not maintain fuel prices at these or slightly higher levels and use those billions – not like the other billions you’ve wasted and plundered – and use it as a very broad based tax to support the needs of the poorest of this country.

The country is not generating enough income to cover the basic needs of 60 million people. The reason being – SA has had a long history of breaking the basic tenants of free market economics. Simply put – the more socialism and government interventions, the less income the country will generate. We are stuck in the death spiral of socialism. The only way out to is tighten our belts, and restore our faith in free market economics.

look carefully : Your belt has been Stolen !

The regime can go suck eggs!

Find the wealth in the Guptas!

**https://www.africa-confidential.com/article/id/12945/Zimbabwe_government_close_to_collapse_as_Ncube_sends_plea_for_cash **

No doubt the ANC will bail these comrades out as well : With our Money !!

What the ZANU-PF forgot, the ANC comrades still have to learn:

In the letter, Ncube said the government accepts “responsibility for the recent policy missteps” and laid out a series of measures the administration is prepared to take if the organisations agree to “high-level” talks.

Those include adopting a market-related exchange rate, ensuring that the central bank no longer lends money to the government, cracking down on corruption, aligning laws to a constitution that was adopted in 2013 but never fully implemented, and electoral reforms.

Ncube also offered to conclude an agreement by June that would lead to the compensation of white commercial farmers who were forced off their land in the past two decades in a violent and botched land-reform program, the decimated export earnings.

Pitout, this is the problem. They all know what the solutions are. They know what they have to do. They even promise to do the right thing if they can get the handout once more. In this regard, the socialist government is no better than the average junkie, and we all know that with junkies, tough love is the only solution. They will beg, promise, plead and pray and the moment they get the funding, they will forget their promises and shoot up again. Countries like that end up in the gutter because frankly, that is where they belong.

the comparison with a junkie is actually very true. sad, but true

This was a great Ad for Bitcoin : (& krugerrands)

We’ve just retrenched 40 people, come tax us, it’s all gone

All stimulus countries will need to pay somehow. Ive seen increased taxes proposed in Canada, Australia and Europe. Where are we going to go then? Theyve all printed money and are all taxing the rich. Is it just cause we’ll be middle class in those countries because of the exchange rate that we’re willing jump from one fire to the next?

Talk about wealth taxes. When WHT on dividends was raised from 15% to 20% that was a 33.33% increase in the rate of tax for those of us who are dependent on dividend income for a living. What other class of taxpayer has endured such a rate of increase in their tax rate?

End of comments.

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