It appears very few want to say it, but it's time the South African Revenue Service got serious about pushing for a more progressive income tax for high earners and a wealth tax for the ultra-high net worth individuals (UHNWI) in the country.
It is certainly unpopular, and ordinarily gets a lot of people worked up about the idea of taxing "their hard-earned money", but it is important for the voices advocating for a serious stance to get louder.
"We all have the same 24 hours in a day," some have been heard to retort. Tax, depending on how it is used, may or may not necessarily be an effective tool for addressing inequality, but it is certainly an option currently available to SARS. SARS currently earns the bulk of its tax revenue from personal income tax, accounting for 38.1% in the last budget period.
Income tax vs. wealth tax
There is, of course, a material difference between an income tax for high earners and a wealth tax for the UHNWI. The former addresses an issue of executive pay and income disparities that even large retail and institutional shareholders of the largest companies have most recently made a lot on noise about. The latter deals with the administration of a tax, which would be proportionate to the assets that you own beyond a certain value.
The Davis Tax Committee (previously known as the Tax Review Committee) was appointed in 2013 and delivered its last bit of work last year, where it reported on "wealth tax proposals" saying that it was premature for South Africa to implement a wealth tax without further research being done.
Wealth Taxes are not without serious challenges; an OECD report (The Role and Design of Net Wealth Taxes in the OECD 2018) found that in 1990, 12 OECD countries had a net wealth tax in place, and by 2017 only four countries still administered a wealth tax. Yet they also argued that "wealth accumulation operates in a self-reinforcing way and is likely to increase in the absence of taxation". Simply, more money is able to make more money.
We often focus on the failures and not enough on the success stories. What of the countries that are still able to sustainably levy and administer net wealth taxes? What are they doing right in ensuring that the correct redistributive mechanisms are satisfied? France, Norway, Spain and Switzerland are the remaining four OECD countries still levying net wealth taxes – all four which continue to play pivotal roles for the European Union.
French President Emmanuel Macron in December 2018 opened the door for reinstating the 36-year old wealth tax levy, also known as the Solidarity Tax on Wealth (ISF), after he had in January the same year amended the tax to only cover properties and exclude investments.
This happened after the country the gilets jaunes (yellow vests) movement, a grassroots citizen’s movement initially protesting rising fuel taxes, ultimately pushed for the reinstatement of the old wealth tax.
Portugal has a similar property wealth tax where properties with a value over €600 000 attract a wealth tax levy from 0.4% to 1%.
In Norway, tax resident individuals have a tax obligation of 0.85% of their worldwide net worth (for assets exceeding approximately €155 000) and the tax treaties they have with 90 odd countries, which prevent double taxation, do not apply on the said net wealth tax.
Spain reinstated its tax on the wealthy in 2011 for assets exceeding €700 000 (previously €120 000) after it had used tax credits to effectively remove the tax effect after the global financial crisis.
There has been no conclusive evidence that a wealth tax in these countries has had a negative impact on investment and savings rate. More interesting is the fact the levy has had materially different outcomes in each of the countries. What this suggests, therefore, is that the outcome of a wealth tax in South Africa may just have the positive redistributive and tax revenue benefits that it ought to.
Pervasive earnings inequality
The 11th edition of PwC’s Executive Directors – Practices and Remuneration Trends Report found that the Gini Coefficient (global measure of inequality) of the employed worsened by 0.011 in the last year to 0.436, with the pay ratios of the largest companies in the country getting wider.
The Davis Report listed an even higher Gini Coefficients of 0.67. It is clear that much work needs to be done to both address the issue of companies paying below a living wage, while the executive teams enjoy disproportionate increases in earnings as well as ensuring that income taxes beyond a particular threshold are subject to a targeted high-income tax levy.
It is often argued that it is not the responsibility of private sector or individuals to deal with the inequality challenges facing the economy, and rather that it is the role of government. Government must exercise its responsibility to use the tools available to it (including legislation) to drive its development agenda.
Sifiso Skenjana is founder and financial economist at AFRA Consultants. He specialises in economic policy research, investment strategy and advisory services. He is currently pursuing his PhD. Views expressed are his own.
Follow him on Twitter: @sifiso_skenjana