SA’s unacceptably high level of inequality is one of the distinctive, and disturbing features of its economy — and it is the reason the Davis Tax Committee supports the principle of wealth taxes for SA. In practice, however, a couple of other distinctive features of the economy — such as SA’s very well developed retirement fund industry — complicate the task of looking at the kind of annual tax on individuals’ net wealth that some would like to see for SA.
The complications, and the thinking, are spelled out in the Davis Committee’s report on the wealth tax, which is one of a cluster of reports which the committee published last week as it wrapped up five years of work in which it published more than 20 reports, delivering on its original 2013 terms of reference from then finance minister Pravin Gordhan and on extra requests since then -the wealth tax included.
At 0.67, income inequality in SA, measured by the GINI coefficient, is one of the world’s highest. But wealth inequality is even higher, at over 0.9, according to research cited by the committee. It emphasises that taxes are not the only, or even always the most effective way to combat inequality. It emphasises too that SA already has wealth taxes, in the form of estate duty (the subject of two other reports by the committee), as well as transfer duty and donations tax.
Davis has staunchly advocated the wealth tax as a way of doing something about inequality. The problem, as its report makes clear, is that SA is in no position to implement it, at least not yet.
It makes the point too that internationally there has been a move away from taxes on wealth, mainly because the administrative and compliance costs often make the revenue they bring hardly worth it relative to the cost of collecting it. The number of OECD countries that levy individual net wealth taxes dropped from 12 in 1990 to just four in 2017, the committee reports — and it might have added that one of those four, France, is in the process of abolishing its wealth tax in favour of other more efficient taxes.
The committee reveals too that of the 132 submissions it received on the wealth tax, fewer than five, the most prominent of which was Cosatu, supported the idea of a recurrent net wealth tax. And committee chair Judge Dennis Davis reckons, on a comparable basis looking at trends internationally, such a tax could raise no more than R4bn to R5bn. So it is not about raising revenue, and no one should imagine it is any sort of answer to SA’s fiscal woes.
But even as symbolism, it clearly matters. Davis has staunchly advocated the wealth tax as a way of doing something about inequality. And the committee still thinks a recurrent tax on net wealth would be "admirable and desirable". The problem, as its report makes clear, is that SA is in no position to implement it, at least not yet.
A big question is what would be the base on which to levy the tax — and this is where SA’s R2.2-trillion retirement fund issue looms large. In many countries, housing assets are the bulk of the wealth individuals own; in SA by contrast, housing assets are only a quarter of household wealth while financial assets are three quarters — and the bulk of that is in retirement funds, which account for over a third of private wealth.
A wealth tax could hardly avoid pension funds if it wanted to raise any meaningful money, and it would be administratively complex to levy the tax at anything other than a flat rate. The big problem is that would tax the retirement savings of millions of lower and middle income South Africans — given that about 5-million of SA’s almost 6.8-million retirement fund savers earn less than the UIF ceiling of R178,000 a year.
Added to questions about what the base would be is the simple problem that SA’s tax authority does not have proper data of any sort on taxpayers’ wealth. So what the committee has recommended is that the South African Revenue Service start asking individuals for annual statements of their net wealth — of assets and liabilities — from the 2020 tax year. That would provide the basis for a proper discussion on a possible wealth tax, as well as starting to build a database that SARS could use as a check on what taxpayers declare as income, even if policy makers opted not to go ahead with an annual wealth tax.
The complexities involved in measuring and taxing wealth are significant, and a poorly designed wealth tax could have serious adverse consequences in terms of giving wealthy taxpayers the incentive to take their skills and their money elsewhere — or simply to pay expensive consultants to help them evade the tax. For policy makers, the crucial question to ask, once the evidence were there, could be whether the costs of levying the tax would be more than covered by the revenue it would raise.
Meanwhile, however, SA already collects 1.4% of its tax revenue from other wealth taxes, particularly estate duty, and the committee believes that share could be raised. Its recommendation to raise the estate duty rate was implemented in February’s budget for estates of more than R30m. Tackling the intergenerational transmission of wealth is one clear way to address inequality. The committee argues also that a land tax would be more effective as a form of wealth tax than the transfer duties SA has currently, though again, it’s complicated.
But it is exactly that kind of evidence-based investigation of how and whether particular taxes work in the real world that the committee has done so well and if that means it brings a dose of reality to a debate like the wealth tax, that can only be good for tax and macro-economic policy making in SA.s
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