Jashwin Baijoo | South Africa must tread very carefully on wealth tax

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According to a report by Treasury and the SA Revenue Service, total tax revenue collections for 2020/21 declined by 7.8% to just less than R1.25-trillion from about R1.35-trillion collected in the previous year.
According to a report by Treasury and the SA Revenue Service, total tax revenue collections for 2020/21 declined by 7.8% to just less than R1.25-trillion from about R1.35-trillion collected in the previous year.
Luba Lesolle/Gallo Images


With discussions on imposing a wealth tax being rife in preceding years, policymakers are turning to the SA Revenue Service (Sars) to look into the feasibility of this new proposed tax to bridge the “widest wealth gap in the world”.

The wealth tax was tabled this past weekend during the ANC national policy conference as the preferred option to fund the basic income grant.

Do the means justify the ends?

While the idea of a wealth tax was initially tabled years ago, it became a topic of wide discussion upon the release of the wealth tax report by the Davis Tax Committee in March 2018.

Fast forward to the 2022 conference, the chair of the ANC’s economic transformation subcommittee stated:

Most of the wealth of this country is in the hands of 5% of the population. That’s not right. We’ll have to have Sars look into (a wealth tax).

This statement, aimed at the wealth equalisation in South Africa, which appears to be the first step, is the permanent implementation of the basic income grant during the Covid-19 pandemic. It is supported by a study conducted by the University of the Witwatersrand. In the study, titled Coronavirus: why South Africa needs a wealth tax now, it was speculated that “a wealth tax on the richest 354 000 individuals could raise at least R143 billion.

READ: Sars gets data on the rich for possible wealth tax

This may sound like an astronomical number, but it is just the tip of the iceberg for the funds needed to even remotely start the wealth equalisation process in South Africa.

A rise in emigration on the cards

One point of concern on the proposed wealth tax is the exodus of the high net worth individuals, who would be the subject of such tax, if imposed. The University of Stellenbosch’s Bureau for Economic Research (the Bureau) has stated that the implementation of a wealth tax may see shrinkage of an already small tax base in South Africa, with these wealthy individuals emigrating in favour of a lower tax jurisdiction.

READ: Budget 2022 | Tax relief, sin tax and debt - here's everything you need to know

As supported by several independent economists and recent reports by research and consulting firm Intellidex, the Bureau raised the concern that should a wealth tax be implemented, it would be done so at a high effective tax rate due to the pool of individuals who qualify being so small.

The idea of a wealth tax is to adjust the financial inequalities in South Africa. It is human nature to do what is best for oneself. This includes protecting hard-earned money against tax, which can be construed almost as punitive in nature, or at least more punitive than the current bracket system of taxation in South Africa.

The Davis Tax Committee’s balancing act

In its final report on the feasibility of a proposed wealth tax, the Davis Tax Committee confirmed, by empirical evidence, that the wealth inequality in South Africa is higher than even global wealth inequality.

READ: SA residents in other countries must pay tax

The adverse impacts of imposing a wealth tax were mentioned, stating “capital migration, disincentives to save, the effect on entrepreneurship and employment must be thoroughly considered”. This would have a large impact on the already small South African tax base, with a knock-on impact of an increased unemployment rate for unskilled labourers and some professionals that are sector dependant.

It has been suggested by the Davis Tax Committee that although the purpose behind the proposed net wealth tax is admirable, long-term sustainability must be considered. This indicates that the proposed tax system must be designed in such a way as not to be deemed prohibitive on wealthy individuals and not exacerbate emigration rates in any way.

READ: Wealthy taxpayers set to cough up R40bn

This will allow the proposed system, in the long run, to generate more revenue than the costs to administer it.

The way forward

Although some studies show an ever-widening wealth gap in South Africa, the country’s tax base can’t afford a further shrinkage.

A wealth tax may be for the greater good, but the implementation must follow a staged and calculated approach to promote the retention of contributing taxpayers and stem the flow of emigration in favour of more digestible taxation.

It must be borne in mind, from a perspective of sustainability and as per the Davis Tax Committee, that “wealth taxes are merely one tool, among many, with which to address the pressing problem of inequality” and should not be relied on in isolation.

Baijoo is a legal manager Africa tax and compliance at Tax Consulting SA

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