The Davis Tax Committee Wealth Tax Report - An Overview

In anticipation of the Davis Tax Committee Wealth Tax Report, the HSF published a series of briefs last year on a wealth tax and whether it was viable method to raise revenue in South Africa. In March this year the Davis Tax Committee published its report on the matter, which this brief considers in the light of the HSF’s work.


The Davis Tax Committee (DTC) Wealth Tax Report ("Report"), released earlier this year, raises some excellent points as with regard to the difficulties which are unique to South Africa in trying to raise a wealth tax. The Report however also seemingly contradicts itself in parts. This brief will focus on the points raised by the Report which were not in the series of wealth tax briefs the Helen Suzman Foundation (HSF) published in April.


Negative real returns

The interest earned on South Africa's cash and savings is often below inflation and a wealth tax will worsen the real1 shrinkage on these.


Most retired citizens live on savings and a further depression on returns from a wealth tax will no doubt do substantial damage to savings incentives - dragging down further the country's already poor savings rate. Another three difficulties here arise. First, a wealth tax would be contradictory to savings incentives, such as retirement savings benefits and tax free savings accounts. Second, a wealth tax would be even further hindered if retirement savings are excluded. At around 2.2 trillion Rand3 these funds make up almost a quarter of the country's total wealth holdings at 9.5 trillion Rand4. Third, acceleration in the depletion of retirement savings, compounded by the fact that people are living longer, will cause retirees to become reliant on the state and others.

Lower revenue potential versus wealthy nations

If wealthy nations are not able to raise sufficient revenue from wealth tax to make it viable, can South Africa? Crucially, when compared to wealthy nations, the wealth to income ratio is lower in South Africa (240 percent versus 400 to 700 percent)5, which leads to lower potential wealth tax revenue in South Africa compared with income tax. And because one of the major reasons wealthy nations abandoned the wealth tax was because of the low revenue it generated, it is difficult to imagine how South Africa could make it worthwhile.

Increased reliance on foreign capital

A wealth tax will hinder wealth accumulation by making the cost of holding large categories of wealth higher than the expected benefit. This will incentivise local investments and savings to be moved abroad and increase South Africa's dependency on foreign capital. Not mentioned in the Report are the potentially devastating consequences that could come from this. In order to attract foreign investors, the government will have to offer more foreign currency denominated bonds. The interest payments on these bonds will be vulnerable to exchange rate movements, and a higher foreign to local currency government bonds ratio will also add downside pressure to South Africa's sovereign credit rating. A ratings downgrade, should it occur, will result in capital outflows which will further weaken the Rand, increasing the foreign bonds interest cost and also imported inflation. These factors all show how a wealth tax which results in a drop in investment and savings can lead to negative results for the government's interest expenditure, the exchange rate and the economy - all of which would likely exacerbate one another in a negative feedback loop.


Inequality and redistribution

In the Report's opening paragraphs it is stressed that a wealth tax is not the most viable instrument to address inequality.6 It however goes on to say that a wealth tax offers support in the redistribution agenda,7 and that wealth must be a legitimate tax base given the high levels of inequality.8 It is then left up to the reader to try and reconcile these contradictory positions. The Report says that improved accounting for assets and interstate cooperation need to be addressed before a wealth tax can become viable. The reality however is that these requirements are unattainable in the foreseeable future. Regarding the first factor, the Report itself notes that the problems in collecting and recording reliable balance sheet data on wealth are "pervasive in developing countries."9 The HSF's Wealth Taxes - Brief III indicates that the competition that exists - and always will - between countries for the flow of investment funds makes the level of tax cooperation required difficult, or well nigh impossible. In the same vein, Piketty himself has stated that a global wealth tax is a utopian idea.10

Taxing retirement funds

The Report notes that taxes on savings and investments have generally increased since the introduction of Capital Gains Tax (CGT) in 2001, but also how they have also decreased for retirement funds; CGT exempt since 2001, Retirement Fund Tax withdrawn in 2007, retirement fund death benefits exempted from Estate Duty in 2009, dividends tax exemption to retirement funds in 2012 and provisions related to retirement age deleted from the Income Tax Act allowing tax-free accumulation of wealth. The Report goes on to state that the decrease in tax for retirement funds is well motivated, and that a wealth tax on retirement funds will run into "enormous administrative complexity issues unless it imposes a flat rate."11 It also notes that a flat rate will make no distinction between rich and poor persons saving towards retirement, with the poor - receiving below the Unemployment Insurance Fund ceiling amount of R 178 000 per annum - making up 74 of all pensioners. Forty four percent earn below the income tax threshold of R 75 000.12 Furthermore, the increased average life expectancy of South Africans to 70 years old by 2030 will create an enormous retirement funding issue, and a wealth tax on these funds will have far-reaching implications. Surprisingly, the section then ends with "Notwithstanding [the above], it is noted that concessions granted to retirement funds in recent years are perhaps overly generous ... in the context of the economic challenges facing South Africa today."13 The Report however does not explain how, despite the difficulties facing pension funds, these concessions are in fact overly generous. Or if pension funds cannot accommodate additional taxes - as argued in the Report - but are implemented anyway, how the potential benefits from these taxes to the rest of South Africa might outweigh any damage they may cause.


A decision on an annual net wealth tax cannot be made without addressing the following three issues:

  1. The appropriate tax base,

  2. Comprehensive wealth ownership data, and

  3. Whether the revenue generated will exceed the administrative and economic burdens.

The most important question regards the first point is whether pension funds should be included. To answer this, the Report suggests an engagement between Treasury, SARS, the retirement fund industry, trade unions and other stakeholders. On point two, the quality of existing data would need to be vastly improved. The Davis Tax Commission suggests that "all taxpayers and beneficial owners of wealth (which includes control of trusts as well as beneficiaries thereof) that are required to submit an income tax return must be required to include the market value of all readily ascertainable wealth in a revised tax return for the 2020 year of assessment. [A]lso ... other forms of wealth where the market value is not readily available (... defined pension funds, shares in private companies, ... etc.)."14 To accommodate this it is recommended that non-disclosure penalties of the Tax Administration Act be revised, which the Report suggests will also assist in reconciling each taxpayers reported income with their assets.

Due to the impossibility of implementing a wealth tax in the short term, and as per the DTC's First and Second estate duty reports, an increase in estate duty is recommended because the administrative capacity for its implementation already exists. This, "coupled with a decrease in unauthorized and wasteful expenditure and enhanced tax morality will go some way towards reducing South Africa's unsustainable levels of in equality."15


By and large, the HSF's wealth tax series of briefs coincide with the findings of the DTC Wealth Tax Report. The Report however points to even greater difficulties not touched on by the HSF. Yet the Report seems to vacillate between stating that an annual wealth tax is not feasible, and suggesting that a wealth tax is needed to reduce inequality and should be considered at some time in the future. For the time being however, the Report recommends an increase in estate duty - an existing wealth tax - that should be enhanced instead of taxing wealth more generally.

Charles Collocott


1 The nominal interest rate minus inflation.

2 South African Interest Rate: SARB repo rate.

32015 Annual Report of the Registrar of Pension Funds.

42017 Credit Suisse Global Wealth Report.

5Anna Orthofer, Private Wealth in a Developing Country: A South African Perspective on Piketty, 2015, 2.

6 Davis Tax Committee : Wealth Tax Report: March 2018, 9-10.

7 Ibid at 31.

8Ibid at 53.

9Ibid at 18.

11 Davis Tax Committee op cit note 2 at 58.

12 Ibid.

13 Davis Tax Committee op cit note 2 at 59.

14 Davis Tax Committee op cit note 2 at 67-8.