Wealth tax: A bad idea

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Sindile Vabaza | Writer and aspiring Economist | Free Market Foundation | mail me | 


National Treasury has indicated that it will assess the viability of a future wealth tax, as it collects more data in the coming months following the recommendations of the Davis Tax Committee.

South African Revenue Service (SARS) will focus on consolidating wealth data for taxpayers through third-party information, Treasury said in its 2021 budget review. This will assist in broadening the tax base, improving tax compliance and assessing the feasibility of a wealth tax.

A recent paper co authored by Aroop Chatterjee (Southern Centre for Inequality Studies), Amory Gethin (World Inequality Lab) and Leo Czajika (Université Catholique de Louvain) argues that in light of South Africa’s inequality levels and the consequences of COVID-19 lockdowns, which have created an environment of dire economic growth, record unemployment and low tax revenue – which will disproportionately affect poor and working class South Africans – a progressive solidarity wealth tax is needed in order to equitably attain fiscal sustainability and better position the economy for post-COVID-19 recovery.

Assuming a 30% evasion rate, the authors claim the tax would raise around R143 billion. The taxes would be levied at a net worth beginning at R3.6 million and would target around 354,000 South Africans, or the top 1% of the wealthiest in the country.

With all that said, the potentially negative consequences of wealth taxation such as capital migration, disincentives to save, and the effect on entrepreneurship and employment must be thoughtfully considered.

Is it just?

This may seem like a strange question to ask given that a lot of commentary on the wealth tax simply assumes that it is right in spirit, but not enforceable practically or harmful because of the adverse effects on wealth creation.

South Africa’s top earners already pay steep taxes, with the top 10% paying virtually all of the personal income tax in the country. This tax revenue has often been mismanaged or perversely been redistributed to a non-value creating political class through all manner and scheme of corruption.

South Africa’s inequality has barely changed since 1994 and, with the exception of the emergence of a small black middle class, the fortunes of South Africa’s poorest residents have remained unchanged.

All the pandemic and the subsequent lockdowns did was expose the structural weaknesses in our economy and society and exacerbate and highlight the wastefulness and bad policymaking of the ruling party.

It is fair to ask why wealthier South Africans should shoulder the burden of years of government mismanagement and poor anti-growth and anti-freedom policies, especially considering the rampant corruption and looting of COVID-19 funds by political actors in this country.

Why would this wealth tax be any different? It is also fair to ask why this solidarity wealth tax is so high (ranging between 3 and 7%), and why it starts at such a ‘low’ base (R3.6 million), when wealth taxes in comparable countries happen at lower rates (Argentina; 0.5%-2.25%, and Colombia; a flat 1%)?

A race to the bottom

In 2000, South Africa’s tax to GDP ratio(which is a measure of a nation’s tax revenue relative to the size of its economy) was 22.4% and has risen sharply over the last nearly two decades to 29.1% in 2018.

In other words if the steep income tax rate in the country is combined with a steep wealth tax rate that starts at quite a relatively low base of wealth, the government will essentially not only stymie savings and investments, it will also stymie the compound growth of individual wealth as a large part of any gains will be hoovered up by the wealth tax and in the event of a prolonged market downturn, the government will still hoover up individual wealth.

The problems with this are obvious. Otherwise productive capital will be confiscated by the government and allocated inefficiently and to often no-productive ends, probably to pay off government’s ever-ballooning debt.

In other words, it will be a race to the bottom where usually wealth creating South Africans will get poorer and more agitated, especially if their wealth is captured by non-value-creating political actors.

It is the usual government way of trying to divide a small pie – instead of growing the pie – and it poses a real danger that wealthy citizens on the fence will simply choose to migrate and take their taxes and spending power with them.

What about structural issues?

A wealth tax will be just another instrument to expropriate private wealth out of the hands of ordinary South Africans, without a real commitment to fiscal responsibility, to pro-job intensive growth policies, and to streamlining and making government more efficient.

How far can a wealth tax really go in a country with endemic youth unemployment (74% as of Q1:2021), where the youth are becoming increasingly unemployable and reliant on the state? How far can it go when only half of all children graduate high school?

In our specific context, it seems to me that a wealth tax is simply another way to avoid dealing with deeper problems around financial mismanagement, poor public policy, and a rabidly socialist government that demonises anyone who wants to create wealth for themselves and their children.

It is telling because this is at the heart of what has gone wrong in our country; anti-capital and anti-wealth sentiment and an inefficient state which simply expropriates without any real appreciation of the toil required to create value and wealth.

It is hard to create wealth at the best of times; if we are to have a genuine post-COVID-19 recovery then the country will need to focus on growing the pie, while cutting unnecessary spending.


 



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