That’s rich! Well-off must pay even more

Don’t feel too sorry for top earn­ers hit by the in­crease in top tax rates. The new level is well be­low what some peo­ple ar­gue is fair. In any case, the rich will find ways to min­imise their real con­tri­bu­tion to the fis­cus

Financial Mail - Investors Monthly - - Opinion - Ann Crotty acrotty@worl­don­line.co.za

Fi­nance min­is­ter Pravin Gord­han is giv­ing 103,000 lucky, and fab­u­lously rich, South Africans a greater op­por­tu­nity to pro­mote the sort of mean­ing­ful trans­for­ma­tion that will “al­low us all to say we all own our econ­omy”.

Those 103,000, who were prob­a­bly well rep­re­sented in the well-heeled au­di­ence (in­clud­ing MPs) that sits in on the min­is­ter’s bud­get speech each year, earn an an­nual tax­able in­come of over R1.5m. Their tax rate has been upped to 45% and is ex­pected to con­trib­ute an ad­di­tional R4.4bn to the fis­cus in 2017/2018.

This means the to­tal con­tri­bu­tion from our su­per-rich will be R126.9bn, which is slightly more than 10% of gov­ern­ment’s to­tal rev­enue for the year.

Not bad for just 1.4% of the 7.4m South Africans who pay tax. Add in a higher div­i­dends tax hit (up to 20% from 15%) and those among the su­per rich who smoke, drink and drive a lot might be feel­ing hard done by.

But don’t feel too sorry for them. The same 103,000 are part of the 10% of the pop­u­la­tion that owns 95% of the coun­try’s wealth. And if all 103,000 of them did ac­tu­ally pay the full ad­di­tional amount, the ex­tra con­tri­bu­tion to the fis­cus would be closer to R7bn than the R4.4bn trea­sury is work­ing on.

Be­cause Sars knows the su­per-rich have ac­cess to lots of op­tions as well as tax con­sul­tants who will be able to whit­tle down their li­a­bil­i­ties, it has been mod­est in its ex­pec­ta­tions on this front.

Ex­actly how mod­est they should be will prob­a­bly de­pend on how well Gord­han is able to per­suade them of their crit­i­cal role in trans­for­ma­tion. In ad­di­tion, he will have to con­vince them he is mak­ing some progress in cut­ting back on gov­ern­ment wastage and cor­rup­tion.

The su­per-wealthy won’t want to hand over their hard earned dosh to a bunch of wasters.

Gord­han told a press con­fer­ence be­fore his bud­get speech that he had not re­ceived in­put from the CEO Ini­tia­tive on the in­tro­duc­tion of the new tax bracket.

Seek­ing in­put from var­i­ous in­ter­est groups is not what the bud­get process is about. But, said the min­is­ter, trea­sury has its an­ten­nae out to lis­ten and de­cide what is rea­son­able. In pass­ing, he re­ferred to sug­ges­tions that 65%, rather than 45%, might be more ap­pro­pri­ate.

What will in­evitably be termed a “wealth tax” is a key part of the bud­get bal­ance Gord­han has to strike be­tween fend­ing off ANC politi­cians in­tent on loot­ing the fis­cus and seem­ing too chummy with those who might be tagged (in­ap­pro­pri­ately, given that a large num­ber of the 103,000 are prob­a­bly not white) part of the white mo­nop­oly cap­i­tal ca­bal.

The be­lief that the 45% tax rate will bring in only about 63% of what it could as­sumes not only more ag­gres­sive tax-avoid­ance mea­sures but also that some of the 103,000 are mo­bile and will head off to friend­lier tax ju­ris­dic­tions.

Cer­tainly there will be much whinge­ing and spe­cial plead­ing by a group that has easy ac­cess to the me­dia. And it may be that when the dust set­tles, many of the 103,000 have headed off. But chances are they will over-egg their com­plain­ing.

In the US, where the threat of mov­ing is rou­tinely used to re­strain tax, pol­icy research has shown the rich are ac­tu­ally un­will­ing to move even be­tween states to re­duce their tax li­a­bil­i­ties, let alone out of the US al­to­gether. And de­spite all the huff­ing and puff­ing, there’s also lit­tle in­ter­na­tional ev­i­dence of cor­re­la­tion be­tween eco­nomic growth and the level of top

tax rates.

That Gord­han’s top tax rate is mod­est by in­ter­na­tional stan­dards is im­por­tant to those (most of us) who be­lieve a tax sys­tem should be fair. Tax­ing the rich will cer­tainly seem fair to those who be­lieve the state (in­clud­ing the pre­vi­ous state) has con­ferred priv­i­leges on the rich.

A 65% rate might of­fend the no­tion of fair­ness — ex­cept in the case of war breaking out.

Any­one who has made their weary way through Thomas Piketty’s book, Cap­i­tal in the

Twenty-First Cen­tury, will have noted the only time in the past 100 years that the lead­ing global govern­ments, on the right and left, man­aged to tax the rich at pre­vi­ously unimag­ined lev­els was be­tween 1914 and the 1970s.

The two world wars were not only re­mark­ably trau­matic events, the mass mo­bil­i­sa­tion that un­der­pinned both led to pre­vi­ously un­heard-of de­mands that the rich should also suf­fer.

The ex­ten­sion of the vote across the globe en­sured these de­mands were heard by new demo­cratic govern­ments.

In par­lia­ment on Wed­nes­day, Gord­han made no men­tion of war, but he did paint a pic­ture of a coun­try bal­anced be­tween rad­i­cal trans­for­ma­tion (com­bined with eco­nomic growth) and con­fla­gra­tion.

In times of war: De­mands that the rich also suf­fer

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