Wealth Taxes VII: Lessons For South Africa

The first brief provided a conceptual framework, the second dealt with the rationales for a wealth tax and the third discusses the problems with wealth taxes. The fourth and fifth briefs dealt with international experiences, and the sixth with land tax.

Introduction

According to the World Inequality Lab, of which Thomas Piketty is an executive member, in South Africa the top 1% of earners held 8.8% of SA's wealth in 1987, and had increased their share to 19.2% by 2012. And in 2017 an Oxfam report found that just three South African billionaires held more wealth than the country’s bottom half combined. The Oxfam figures however date from January 2017, before the Steinhoff debacle wiped out a significant portion of Christo Wiese's wealth. [1]

Due a decrease in GDP over recent years, compounded by inefficiencies in government, the South African fiscus has experienced a decrease in revenue collection and currently finds itself with a shortfall of around R50 bn.

Presumably in light of the above factors (increasing inequality and decreasing tax revenue), in 2016 the South African Minister Finance, Pravin Gordhan, asked the Davis Tax Committee (DTC) to investigate the feasibility of a wealth tax in South Africa. The DTC took submissions from the public in early 2017 but is yet presented its findings.

Drawing upon the experiences of other countries as discussed in briefs II to V, this brief summarises the lessons that can be learned for South Africa.

Net wealth taxes for South Africa?

Empirical evidence suggests that currently it is difficult to conceive a wealth tax that will likely benefit South Africa.

On combating inequality, in all the studies from countries that have imposed a wealth tax in the past, there is no proof that inequality had lessened as a result of wealth taxes. And in France where wealth taxes are still imposed, equality has kept growing. Thus the implementation of a wealth tax in South Africa in hope that it’ll lessen inequality appears misguided.

However, Scandinavian countries offer interesting insights. The majority of these countries have abandoned wealth taxes and yet they boast some of the most economically equal societies globally. This seems little or anything to do with fiscal policy and more to do with a societal buy-in to social democracy and comparatively high levels of union participation.

As a potential source of government revenue, for all countries that have imposed or currently apply wealth taxes, the collection figures have been at the very low end. As discussed in brief II, this is due to the inherent high costs of wealth tax of collection as well as the related high levels of avoidance and evasion. All the 10 countries listed in brief IV that have abandoned the wealth tax cited low revenue as the primary reason.

Judge Dennis Davis of the DTC is quoted as saying “I would be very surprised if a wealth tax brought in more than R5 bn a year.” [2] In line with experiences elsewhere, this would come to 0.44% of total revenue for the 2016/17 tax year.

Only when or if government policy and technology adapt sufficiently to address implementation difficulties will wealth taxes become worthwhile. However, the natural dynamics between taxpayer behaviour and government policy makes this highly unlikely. Taxpayers do what they can to try avoid taxes and government responds with policy changes to try curtail the avoidance. Thus policy generally, if not always, plays catch up to taxpayer behaviour. Similar logic applies to technology. While technological improvements have brought down the cost of asset valuation and given authorities new tools to track asset flows, technology has also exponentially increased the mobility of financial assets, resulting in ratepayers constantly being able to invent new ways to avoid and evade taxes. So much so, that the mobility of modern capital has been cited by several governments as one of the reasons for abandoning wealth taxes.

The ancillary arguments for wealth taxes, such as improving tax equity, reducing tax avoidance and encouraging efficient resource use, are all based on theory with no definitive empirical support.

The empirical evidence that does exist indicates the drawbacks of wealth taxes. These include a far heavier burden on the middle class than the rich, an overall decrease in tax revenue from ratepayer emigration, capital flight, increased debt to reduce net wealth, an increase in required rates of return on investments, lower entrepreneurship and as mentioned above, the complexities of administration, high cost of collection and low revenue.

Conclusion

Not surprisingly, the major driving force behind the implementation of wealth taxes in recent times has been politics. In a society as economically divided as South Africa, it is easy to imagine how politicians would be able to effectively use wealth taxes to leverage the feeling of solidarity and wish for equality among the majority of citizens in order to gain political support. The real economic effects however will be the opposite of the intended effects, and South Africa society as whole, not just the rich, will most likely be poorer for it.

Ultimately, if the government is to make an impact on inequality, and if treasury is to increase revenue, they should not allow themselves to be led up the garden path of wealth taxes.

Charles Collocott
Researcher
charles.c@hsf.org.za

Notes

[1] https://www.fin24.com/Money/Home/sa-inequality-grows-as-rich-take-larger-share-report-20171214

[2] Ingé Lamprecht, 2016