Introducing a wealth tax is one of the proposals for a government facing a budget shortfall after coalition partners blocked the Treasury’s plan to raise the VAT rate to 17%, say sources.
The proposal emerged at a special cabinet meeting on Monday, which focused exclusively on the possible amendment of the budget that was slated for presentation last week, said three senior officials aligned to the ANC within the government of national unity (GNU), who spoke to Business Day on condition of anonymity.
The draft budget pencilled in a 0.9%, or R173bn, a year real increase in spending over the medium term. This would have been mainly financed by the two percentage point increase in VAT. To cushion the poor, the Treasury proposed expanding the list of tax-exempt foods.
However, the Treasury has also made it clear that borrowing is off the table as gross public debt is estimated to reach 76% of GDP, almost twice the ratio recommended by the IMF for economies of SA’s size.
The introduction of the wealth tax has the potential to plug gaping holes in Treasury spending plans but it is likely to face fierce opposition from the DA, the core constituency of which favours lower taxes and economic liberalisation.
Other critics of the wealth tax are likely to express worries that it could turn a well-intentioned policy into a loaded gun, driving wealthy individuals to relocate to more tax-friendly countries, shrinking the tax base.
“Given high levels of inequality, a wealth tax could still be considered, but it is easy to overestimate how much revenue it will generate since it will be administratively complex, and the super-rich are globally mobile. It is better, as the Sars [SA Revenue Service] commissioner has indicated in the past, to improve compliance with existing tax law,” said Izak Odendaal, a strategist at Old Mutual Wealth Investment.
Any proposal to help stabilise government debt and plug the budget shortfall requires agreement of all parties in the 10-member GNU.
DA leader John Steenhuisen, who claimed the postponement as a political victory, has previously said it would not support an increase in VAT and has made alternative proposals including implementing the World Bank’s regulatory review which “proposes reducing tariffs that make SA manufacturing uncompetitive, boosting exports and industrial growth and eliminating tariffs on products SA doesn’t produce”.
“The budget that is announced on March 12 is an opportunity to level with the people of SA. We need to be honest about our fiscal constraints,” Steenhuisen wrote in Business Day on Monday.
The DA is to set out its proposals for the amended budget at a media briefing on Tuesday. Without the DA, the ANC does not have enough votes in parliament to pass the budget.
Proponents of the wealth tax argue that it could help address stark inequality, redistributing wealth from the richest individuals to fund social programmes and public services.
The Institute for Economic Justice (IEJ), which successfully hauled the Treasury before the courts over the stringent criteria for accessing the R350 social relief of distress grant, said the budget postponement opens the way for the implementation of a wealth tax.
“The two percentage point VAT increase is not the only misguided decision. So too is the continued path of underinvestment. Equally problematic is the DA’s extremist position of ‘no tax increases’. The inevitable consequences of this position would be draconian expenditure cuts that would harm the poorest,” it said in a statement.
The proposal to implement a wealth tax has been in the Treasury's pipeline with acting head of tax and financial sector policy Chris Axelson telling MPs after the tabling of the medium-term budget policy statement in 2024 that the proposal was being considered with Sars. The Treasury is examining the levels of wealth that had been declared to the tax authority and what a potential wealth tax could be.
In the Treasury’s draft budget documents, it noted that parliament’s standing committee on finance is “exploring progressive tax options, including taxes on luxury items and wealth taxes. Stakeholders suggest this approach could reduce fiscal strain without overburdening low-income households. Sars is collecting and analysing wealth-related data through its High Net Worth Individuals Unit,” however, no final decision has yet been made on the proposal, the documents reads.
With Kabelo Khumalo
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