Should the rich be taxed more?

2014-02-24 22:26

The fact that the majority of wealthy people in South Africa are white remains uncontested. Archbishop Desmond Tutu once slammed white South Africans who had unfairly benefited from Apartheid, and that its impact was muddled with the erosion of self-esteem and the installation of ‘self-hate’ among many black South Africans.

The redistributive impact of taxes has been unnerving. South African can almost be classified as a high tax country but yet income inequality remains the highest in the world and instances of poor service delivery, corruption and maladministration remains prevalent.

We cannot completely rule out the fact that higher income groups undoubtedly play an important role in the economic development of the South African economy, in terms of where the wealth, savings, investment and skills are concentrated. We cannot, too discredit the fact that the under-declaration and evasion of taxable labour income is a major problem that is prevalent among many wealthy people. Even though the tax receipts of the wealthy are significant, of the 45 000 people who earned more than R2.4 million a year, still only about 17 000 paid their dues in 2012. Surely a lot can be done to raise tax revenue by ways of improving tax collection, compliance, simplicity and administrative capacity, reducing tax expenditures and relief on capital gains, and eliminating tax loopholes and harmonizing tax rates on different forms of capital to prevent income shifting than to impose higher tax rates on the small base who do pay their dues.

But while taxing the wealthy is politically acceptable, one also has to be cautious because of their economic significance. It would be indeed better to “soak” instead of “squeeze” those wealthy people who generate positive externalities, like savings, investment, risk-taking, innovation and skills. A tax on accumulated savings can, however, be both beneficial and harmful to an economy. For one, any tax on saving translates into less incentive to accumulate capital and leads to a lower rate of investment and economic growth. On the other hand, as wealthy people become even more wealthy they would experience diminishing returns to capital and then have large, idle asset bases that are not productively deployed.

But raising taxes to a level that is unusually high for any emerging market economy and comparable to that of the developed world cannot be concomitant with the level of corruption, nepotism, unqualified appointments, maladministration, irregular procurement processes, irregular and wasteful expenditure, and poor service delivery. Creating social cohesion necessitates not higher tax rates on the wealthy but rather expenditure support and development programs that are targeted at the poor and various measures that increase income tax progressivity, for example, by reducing tax expenditures and relief that favour the wealthy but does not discourage saving and investment, eliminating tax loopholes for income shifting opportunities, and improving tax collection and administrative capacity.

A system of expropriation from the wealthy to the poor when there is an unacceptable level of corruption and poor service delivery, whether the objective is to reduce income inequality or to raise additional tax revenue, is disheartening and fruitless. Even though a relatively higher tax rate on wealthy people is politically and socially acceptable, we cannot expect to make the poor well off by making the rich worse off.


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