Wealth tax ‘not worth the cost’
WOULD BE TOO ONEROUS, SAY EXPERTS
The compliance cost and market distortions associated with a wealth tax may exceed the benefits of introducing such a tax, practitioners have warned.
Against the background of the highly unequal distribution of wealth in South Africa, the Davis tax committee has called for submissions on the desirability and feasibility of three forms of wealth taxes – a land tax, a national tax on the value of property (over and above municipal rates) and an annual wealth tax. Stakeholders have until May 31 to submit proposals. A workshop for oral submissions will be conducted next month.
South Africa has three forms of wealth taxes – estate duty, transfer duty and donations tax, which collectively account for roughly 1% of tax revenue.
David Warneke, head of technical tax at BDO, says most of the countries that tinkered with a wealth tax have abandoned it due to the compliance costs.
There are other problems. Often, people don’t have the liquidity to pay the tax. In the case of a land tax, people may have to sell the land to pay the tax, he says.
Warneke says there is a general feeling that government is in danger of “killing the goose”.
The rates of tax in South Africa are high relative to what high net worth individuals receive in exchange. There is a danger of a flight of capital, emigration and a loss of skills should more taxes be imposed, he adds.
Andrew Wellsted, director at Norton Rose Fulbright, says the administrative cost of implementing any new tax is high and “may well not generate the revenues hoped for. This has historically been the case, for example, with estate duty.”
Lisa Brunton, an attorney specialising in tax and exchange control at Cliffe Dekker Hofmeyr, says the expense involved in implementing and administering a new wealth tax doesn’t seem warranted given the low level of revenue wealth taxes generally amass.
Given the revenue target, there more cost-efficient tax forms that could be employed: “Better yet, why not curb wasteful and/ or irregular government spending before considering increasing existing tax rates or introducing new ones? The auditor-general estimated that the government wasted in excess of R30 billion in one financial year alone.”
Wellsted says the introduction of yet another tax to be borne predominantly by South Africa’s small tax base could cause more harm than good.
The addition of yet another tax, such as a wealth tax, will simply be asking the same contributors to apply more funds towards the fiscus, he adds.
Warneke says while inequality is a significant problem, he doesn’t believe imposing further taxes will solve the problem.
“[You] can’t stifle growth and have redistribution,” he says. Brunton says the municipal property rates tax system, which has been in operation since 2004, is a land tax. To impose a national land tax, a single valuation roll would be required.
“This would create valuation problems since municipalities do not employ unified valuation methodologies across the board.”