Wealth tax could be a symbolic gesture, but it could tax SARS
SA’s unacceptably high level of inequality is one of the distinctive and disturbing features of its economy — and the reason the Davis tax committee supports the principle of wealth taxes for SA.
In practice, however, a couple of other distinctive features — such as SA’s very well-developed retirement fund industry — complicate the task of looking at the kind of annual tax on individuals’ net wealth that some would like to see for SA.
The thinking is spelled out in the Davis committee’s report on the wealth tax, one of a cluster of reports the committee published last week.
At 0.67, income inequality in SA as measured by the Gini coefficient, is one of the world’s highest. But wealth inequality is even higher, at over 0.9, according to the committee.
It emphasises that taxes are not the only or even always the most effective way to combat inequality. It emphasises that SA already has wealth taxes, in the form of estate duty (the subject of two other reports by the committee), as well as transfer duty and donations tax.
It also points out that internationally there has been a move away from taxes on wealth, mainly because the administrative and compliance costs often make the revenue they bring hardly worth it relative to the cost of collecting it.
The committee reveals that of the 132 submissions it received on the wealth tax, fewer than five, the most prominent of which was from Cosatu, supported the idea of a recurrent net wealth tax.
And committee chairman Judge Dennis Davis reckons such a tax could raise no more than R4bn to R5bn. So it’s not about raising revenue, and no one should imagine it is any sort of answer to SA’s fiscal woes.
But as symbolism, it clearly matters. Davis has staunchly advocated the wealth tax as a way of addressing inequality. And a recurrent tax on net wealth would be “admirable and desirable”. The problem, the report argues, is that SA is not yet in a position to implement it.
A big question concerns the base on which to levy the tax — and this is where SA’s R2.2-trillion retirement fund issue looms large. In many countries, housing assets make up the bulk of the wealth individuals own; in SA, housing assets are only a quarter of household wealth while financial assets are threequarters and the bulk of that is in retirement funds, which account for over a third of private wealth. A wealth tax could hardly avoid pension funds if it wanted to raise meaningful money, and it would be administratively complex to levy the tax at anything other than a flat rate. It would also tax retirement savings of millions of lower- and middleincome South Africans, given that about 5-million of almost 6.8-million retirement fund savers earn less than the UIF ceiling of R178,000 a year.
Additionally, SA’s tax authority does not have proper data of any sort on taxpayers’ wealth. So the committee recommends that the South African Revenue Service (SARS) starts asking individuals for annual statements of net wealth — of assets and liabilities — from 2020.
That would enable a proper discussion as well as begin to build a database SARS could use as a check on what taxpayers declare as income, even if policy makers opted not to go ahead with the tax.
A poorly designed wealth tax could have serious adverse consequences in terms of giving wealthy taxpayers the incentive to take their skills and their money elsewhere — or simply to pay expensive consultants to help them evade the tax. For policy makers, the crucial question to ask would be whether the costs of levying the tax would be more than covered by the revenue it would raise.