Disadvantages of wealth tax outweigh the advantages

THE Davis Tax Committee has called for written submissions by May 31, 2017 on the desirability and feasibility of wealth taxes for South Africa. It has advised it will adopt a participatory and consultative approach allowing for wide engagement with all stakeholders on the issue.

According to the Davis Tax Committee, there are currently three forms of wealth taxes in South Africa – transfer duty, estate duty and donations tax. Although some regard capital gains tax (CGT) as a wealth tax, the Davis Tax Committee does not, it views CGT as a form of income tax on capital.

The possible forms of wealth tax which the DTC are considering are: A land tax; A national tax on the value of property (over and above municipal rates);

An annual wealth tax. In its First Interim Report on Estate Duty, the Davis Tax Committee made some observations on wealth taxes. It noted South Africa was not unique in its minimal contribution made by wealth taxes, and many countries such as Australia, Mexico and Canada had no wealth taxes. Where countries do have wealth taxes, they are relatively low yielding taxes.

The Davis Tax Committee has previously pointed out there are some advantages to wealth taxes, such as contributing to vertical and horizontal equity, encouraging the productive use of assets and providing a useful check for taxes on income.

However, the disadvantages far outweigh the advantages, which may explain the steady decline in the number of countries making use of such taxes.

The problems with wealth taxes are well documented. There are difficulties and costs associated with identifying, measuring and valuing net assets on a periodic basis. They are inefficient because compliance and collection costs are high.

Furthermore, they may encourage persons to transfer their wealth offshore or even emigrate to more tax friendly jurisdictions. Recurring wealth taxes may also be a disincentive to entrepreneurship, discourage saving, and increase borrowings by illiquid taxpayers who have insufficient income to pay the tax.

Winston Churchill said, “that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle”. Undeniably wealth distribution in South Africa is highly unequal, but more growth rather than more taxes may be the solution.

This article has been written by Palmer, a director in the Commercial Department of Garlicke & Bousfield. For more information contact him on 0315705496 or

083 637 1868, or e-mail graeme.palmer@gb.co.za

Note: This information should not be regarded as legal advice and is merely provided for information purposes on various aspects of tax law.