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What a wealth tax could look like

Unlikely to contribute more than R5 billion per annum to state coffers.

JOHANNESBURG – A wealth tax, if introduced, is not expected to add more than R5 billion to state coffers.

This is a drop in the bucket compared to government’s consolidated revenue target of R1 324 billion for 2016/17, but presumably more politically palatable than the estimated R15 billion to R20 billion a one percentage point increase in the VAT rate would raise.

As government struggles to make ends meet and amid efforts to reduce inequality in South Africa, the idea of a wealth tax re-emerged after French economist Thomas Piketty mooted the idea during a visit to the country. 

The Davis Tax Committee (DTC) is in the early stages of its wealth tax review and is expected to release its findings by the first quarter of 2017.

Judge Dennis Davis, who heads up the DTC, says some options include an annual tax on wealth, re-examining a land tax or reinforcing the Estate Duty Act.

Estate duty is regarded as a wealth tax, but the DTC rejects the notion that capital gains tax is also a wealth tax.

“Capital gains tax is just tax on deferred income. It is not a wealth tax,” Davis says.

While proposals around a wealth tax will likely re-ignite concerns around South Africa’s small tax base, there are also other issues to ponder.

Davis says the institutional design of a wealth tax is quite complicated and has to consider the administrative cost and potential for revenue collection. Comparative wealth taxes around the world do not produce huge sums of money.

“In the South African context I would be extremely surprised if a wealth tax brought in more than R5 billion a year.”

While a wealth tax would be aimed at very affluent South Africans and not at an overburdened middle class, it is unclear where the line would be drawn.

Although the committee is concerned about overtaxing wealthy individuals, it is more worried about overtaxing people who can’t afford to pay tax.

“You cannot run a society like ours – you just simply can’t – without understanding that given our history people who really are extremely wealthy need to pay an additional sum of money in order that we attain social stability and decrease inequality. It is absolutely clear to me that that must be the case and that is why certain kinds of taxes like an estate duty seem to me to be the least interfering.”

“Why should the next generation simply perpetuate the advantage of the previous generation without any penalty?”

While some wealthy individuals are notoriously greedy and don’t want to pay additional taxes, there are also a number of people who would be willing to pay more if they knew the money would go directly to the sources of need and would not go to waste as a result of inadequate procurement or corruption, Davis says.

But how likely is the introduction of a wealth tax?

Michael Honiball, director at Werksmans Attorneys, expects a wealth tax to be introduced in future.

“South Africa has a socialist government and there is a large discrepancy between the rich and the poor, and the rich can afford it if the percentage is not too high and if it kicks in at a high enough threshold.”

While South Africa’s tax base is small in relation to income tax, there are many people who have a low income, but significant assets – if the rate is low enough, they would be able to afford it, he says.

If the rate of a wealth tax is low, for example 0.5% of all assets on a net asset value basis (in other words, after any debt was deducted), starting with anyone with over R30 million in total assets (R30 million is the level at which the DTC proposed the estate duty rate should increase from 20% to 25%), South Africa can afford to introduce a wealth tax, Honiball argues.

Muneer Hassan, senior tax lecturer at the University of Johannesburg, also expects a wealth tax to be introduced.

“The Minister already indicated in the 2016 budget that we will require additional taxes of around R15 billion over the next few years.”

Hassan says South Africa already has wealth taxes in the form of donations tax and estate duty. South Africa has a small tax base and its tax-to-GDP ratio is increasing. With a small tax base the options available to increase revenue collections within the context of limited growth are few.  

Andrew Wellsted, director at Norton Rose Fulbright, does not expect a wealth tax to be introduced.

South Africa has several forms of wealth taxes in place already, he says.

These include a progressive income tax system, capital gains tax (a tax on invested capital which ordinarily applies only to the wealthy) and estate duty. A further specific wealth tax would place additional, unsustainable pressure on taxpayers already subject to these taxes, he argues.

“South Africa’s tax base is too small to constantly increase tax rates or introduce new taxes as the fiscus requires additional funds. There may well be significant negative implications arising as new taxes are applied to an already highly-taxed tax base. It has been shown in numerous studies that increasing tax rates beyond a certain threshold can have the effect of reducing tax collection overall and this should be borne in mind.”

The wealthy can afford to invest in structures that minimise taxes, and they will do so if they feel that they are being taxed excessively, Wellsted adds.

These issues are exacerbated by the Treasury’s practice of introducing “new” taxes to fund pressing social programmes. This includes the “sugar tax” and the proposed funding of the National Health Insurance among others, he says.

“It becomes untenable to levy further taxes when the tax base is so severely taxed under numerous different tax laws.”

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ahh if it moves tax it! good old socialist doctrine. at one time the uk had a top tax rate of 19/6 in the £ (99.5%). this will certainly help job creation (I don’t think!!). wld suggest a wealth tax would be very difficult to implement and administer. so my suggestion is a tax on property sales – deducted before the seller receives the proceeds. this wld be relatively easy to implement – no need to wait until people lodge their tax returns and wld provide an immediate steady income stream for the govt to fund new benefits for the cadres. I wld initially have a 25% tax rate on the proceeds – limited to any property that was previously in a “whites only” area. this will appease the @feesmustfall who wnt an apartheid tax – which this would be. it should also dampen the crazy prices for properties in w cape and esp the atlantic sea board

Well clearly government is scratching around for whatever money it can find from the ever-reducing tax base. Far more money would be raised (saved) if No. 1 and his cronies are kicked out and the ever increasing State Capture antics stop. Money will be put to better use and directed to where it is needed like uplifting the poor, university fees, improving education etc etc etc.

But no, let’s rather enrich ourselves, milk the wealthy and stuff the poor. All really a complete disincentive to pay tax, no wonder people are leaving or avoiding tax where they can.

Agree don’t always look to the burdened tax payer, if we were in the majority and the increase in tax was minimal to raise a lot of money that would be fine. But the problem is that a large increase is needed to milk a small group again.

Look at government fire every second person, and as said No 1 and his cronies need to be kicked out and a new lot elected, the new lot would be told that this is a calling not a get rich quick scheme, pay them what they worth. They don’t need free flights all over the world, or trips all over the world to study housing in Uzbekistan, no more blue light brigades they are not that important. A huge tightening of the belt will solve the problem and to boot they will have cash to fund free western style education. De-colonized education is cheap, no books, no tablets, no class rooms sit under a tree and listen to old wives tales like they did pre 1600.

The tax base is increasing (fortunately ..though not fast enough obviously) – but I agree 100% that corruption & waste is much more of a priority.

Once again ppl looking to the welathy to solve their problem instead of looking at the governemnt who has either caused or enable the problems. Same thing with university education.

A wealth tax would cause considerable damage to the country. It will drive out wealth/the wealthy. Wealth will simply move territories. It will negatively impact investment.The R5bn raised will cost R100’sbn.

All these ideas as to how additional tax can be raised is all well and good, however there is a missing element in this whole process – that of accountability. So as much as treasury set the parameters by which SARS collects taxes no entity is responsible for evaluating whether the taxes raised were spent judiciously and if not are held to account and made to repay the inappropriate spend. Every single department in government should be compelled to draw a budget prior to each tax year and if the budget is signed off then 2 things must happen 1) funds not spent must be returned to treasury by year end 2) those that exceed their budget without the necessary approval – then heads must roll even if it means jail time for the miscreants. I as a tax payer object to the fact that there is no accountability as to whether my taxes have been well used and are in fact going to those in need of upliftment. Can’t understand that the government want to take away from the wealthy all the time instead of creating an environment where the poor can be employed and in time also become wealthy – why is the common denominator always to make the wealthy poor

It is a have, have not thing. Since 1994 they have been hell bent about taking from those that made something in the old days.

hindsight is a great science, in the bad old days there were all these unemployed people, so what better than to employ them. Salaries may have been low but at least they all had some sort of work. See your comment re: creating an environment where the poor can be employed. what stopped this? Minimum wage and trade unions.

The problem with having to having to return spent funds is that it may lead to unnecessary expenses to prevent future reductions.

If my department maintenance cost is normally R100 per year but this year not a lot of maintenance was require say R50 (because say new equipment), so there is R50 left over, now I need to either return it, in which case my expense is only R50, or I can spend it on maintenance even when the maintenance isn’t needed this year.

Choosing the latter is then wasting money, however choosing the former result in someone saying, maintenaince is R50, so next year you also get only R50 even when this year was just an anomaly in being low, even if R100 is normally needed.

So the end result is the extra R50 is spent not because it is require but to prevent the required budget being reduced in the future.

A new tax always starts small. We will only tax the rich, then after some time, we will only tax the upper middle class, and so it goes on until we tax everybody.

I think that the wealthy would not mind paying a little more tax. The problem is there is no value for money. Dirty streets, poor sanitation, potholes, danger of being robbed or murdered and no social system for anybody and so on…. It is just not on.

Guys !!

It doesnt matter how much you tax, if its all pi$$ed down the drain !!

It seems like sanity and tax are inversely proportional in SA.

We are in a vicious circle here, and you can tax till the crickets are coughing up, aint gonna change a thing.

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