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Wealth tax – is the rumour being realised?

It may be for the greater good, but implementation would need to follow an approach that strives to keep contributing taxpayers in the country.
It is human nature to want to protect hard-earned money against a tax that could be construed as almost punitive in nature, says the author. Image: Moneyweb

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 ANC’s National Policy Conference, where a wealth tax was tabled as the preferred option to fund the basic income grant.

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.

Do the means justify the ends?

Fast forward to the 2022 conference, and the 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  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 the 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.

Read:

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 (BER) has stated that 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 BER 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 to 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 that can be construed as almost 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,: “The adverse consequences of wealth taxation such as capital migration, disincentives to save, [and] 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, that: “Wealth taxes are merely one tool, amongst many, with which to address the pressing problem of inequality,” as per the Davis Tax Committee, and should not be relied on in isolation.

Listen as Fifi Peters talks to BER chief economist Hugo Pienaar about what the proposed wealth tax means for the economy (or read the transcript here):

Jashwin Baijoo, Legal Manager, Africa Tax and Compliance at Tax Consulting SA.

COMMENTS   6

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A tax is supposed to be a transaction, not a donation.

The tax is supposed to buy cost-effective services for the taxpayer. A tax is beneficial when both the taxpayer and society benefit. When one party loses and another party gains, it is a process of coercive redistribution.

Redistribution implies that the fruits of the labour of a person who added value to society are expropriated under force, to give to another person who never added any value. The beneficiary has political value though, and that political value is the driving force behind the process of redistribution. The government uses its legal powers to plunder the property of value-creating citizens to reward those who have the power to make laws. The recipients have value as human beings, but they have zero value as economically- active agents. They do not contribute to economic activity. They have a negative economic value, leading to the effects of the Malthusian Trap. Population growth in a society of negative economic value invariably results in starvation or malnutrition.

Socialism is a glorified process of plunder that punishes those who contribute to the economy and create jobs, to reward those who are a drag on the system. In a free market economy, wealth results from the powerful combination of cognitive ability, accountability, and self-reliance. An economy crumbles and the jobs market evaporates when a society becomes unaccountable, unreliable, childish, dependent, needy, and stupid.

Wealth relies on political connections or cronyism in a socialist economy. In other words, people with a shameless sense of entitlement, who hide behind their victimhood, become wealthy in the socialist system, while it impoverished accountable and self-reliant citizens.

This is why the capitalist system breeds the entrepreneurs, employers, investors, and risk takers who create economic growth and jobs, while the socialist system breeds the cadres, cronies, corrupt criminals, privileged labour union members, and BEE projects that destroy the economy and creates unemployment.

People act on incentives. The profit motive incentivizes entrepreneurs to serve consumers. A tax that is not a transaction, does the opposite. It punishes entrepreneurs for serving consumers. Then, the tax becomes a disincentive that discourages new entrants into the job-creating process. At this stage, the consumer is the biggest loser, and everybody is a consumer.

After 3 decades of socialist policies, they propose more taxes as the solution to address the negative effect of too much taxation. The wealth tax will inevitably speed up the downward spiral and destroy the alternatives for consumers. Socialism enslaves consumers.

The past few years have given SARS the additional revenue stream to keep things on an even keel – namely the sale of SAB and the BHP CGT event…there seems to be nothing forthcoming in the forseeable future which means that, together with the emigration of wealth taxpayers, is leaving SARS with a conundrum!
Do they reign-in Gov. spending? – not likely as the ANC needs to continue to buy votes with grants and gov employment contracts.
Do they support the nationalisation of the SARB so as to control the value of the Rand? – it’s a possibility
Should they increase revenue by introducing a wealth tax? – This seems like the easiest option and the one that will be taken.

None of these questions would be necessary if we had a functioning economy without racist BEE legislation, political connected corruption, weak leadership, inferior education and overpopulation.
The ANC should be dealing with these problems first instead of punishing those that are trying to keep the lights on!

If you want “wealth equalisation” then start with getting money back from politically connected corruption. Punish those that have beniffitted from it too – that will send a message to future corrupters and fill the coffers to assist those in real need!

The wealthy have shelters. What would the wealth tax position of a discretionary trust be that has R100m in equity and no debt? Would the trust be taxed before it distributes anything to beneficiaries? Would the beneficiaries be deemed to have received their share of the R100m and wealth-taxed on that share?

Would we just throw out all the laws and court cases about trusts and taxation?

How will the wealth tax deal with non-liquid wealth? Johnny owns a farm worth say R50m He has debt of R15m leaving him R35m net wealth. Levying a 20% wealth tax won’t help unless Johnny borrows R7m with which to pay SARS because he has no cash.

How will they deal with obligations? Johnny is worth R35m but if he died tomorrow R17m would go to his wife in terms of accrual. Tax her on a deeming provision?

Only wealthy individuals will be able to understand your thought-provoking comment.

This reminds me of the interview with Zuma regarding the Nkandla issue. He said, “people who vote for the ANC cannot read. So the negative reporting won’t influence the way they vote. Clever people don’t vote for the ANC anyway”.

This was the only time Zuma was honest and correct, by the way.

They don’t understand, and that is why they propose a new problem as a solution to the existing problem.

One should also bear in mind that material inequality is merely a manifestation of the difference in capability and attitude of people. It is a natural phenomenon that develops spontaneously in any free society.

South Africa is one of the most diverse societies on earth. People with high cognitive ability and skills live among unschooled people with constrained cognitive ability and no skills. Some are capitalist and protestant, and some are communalist and traditional. If everyone in this diverse society is equal under the law, it must result in material inequality. The only way to rectify inequality in such a society is to treat people differently.

We can either have equal rights in an unequal society, or we can be materially equal in an oppressive society, but we cannot have both simultaneously. This is where BEE, cadre deployment, and the wealth tax enter the scene. These systems treat people differently in order to make them equal.

End of comments.

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