Wealth tax should not be an option

If Finance Minister Tito Mboweni is indeed thinking of imposing a so-called wealth tax as a way to close the government’s ballooning deficit, he should reconsider.

A wealth tax, which is generally defined as a tax on someone’s assets, was under consideration according to a report by Bloomberg, which says that National Treasury discussed the possibility of a wealth tax earlier this year.

Talk of a new tax comes as the minister is under pressure to find new tax revenue streams, as the Covid-19 crisis is expected to result in a revenue shortfall of R300 billion and see the deficit reach R761.7 billion, equating to 15.7% of GDP in 2020/21.

Citadel Fiduciary MD Hilary Dudley warns that if the state were to push ahead with some kind of wealth tax, it will see South Africa’s already stretched tax base come under more pressure and lead people to examine their options.

“We are at the top of the Laffer curve [a measure of the tax rate against the tax revenue collected], and taxing those who already pay the most more is not necessarily the solution. They are more mobile, have other options, and are likely to tax migrate.”

Independent economist Mike Schüssler echoes Dudley’s concern that South Africans are carrying too much of a tax burden as it is, noting that SA already has the 10th highest personal tax rate and seventh highest corporate tax rate in the world.

The idea of a wealth tax is a much-debated and contentious issue. A working paper by Wits University’s Southern Centre for Inequality Studies together with the World Inequality Lab says a wealth tax on the richest 354 000 individuals in SA could not only raise as at lease R143 billion, the revenue raised from it could be used to address income inequality in the country, which is the highest in the world.

Read: Coronavirus: Why South Africa needs a wealth tax now

Citadel portfolio manager Mike van Der Westhuizen disputes this figure: “The R143 billion figure is not realistic over a shorter time frame. It is more realistic that it could be collected over a number of years. Assuming that the tax can be properly administered.”

Difficult to administer

The matter of how to administer a new tax is also something that could lead to it underperforming, as it requires the South African Revenue Service (Sars) to come up with a very precise definition of what constitutes wealth.

“It will be very challenging given that there is no certainty on basic principles such as what constitutes wealth, how to value wealth, and how this tax will be levied. It will also come at an administrative cost for both Sars and the taxpayer, as they learn how to correctly implement the new tax,” says Dudley.

“It would be more efficient to focus on better implementation and the collection of the existing capital taxes.”

Up across the board

Even if the government pushes ahead with a wealth tax, Schüssler warns that it will not be enough to cover the tax revenue shortfall. He says he would not be surprised if the state increases the carbon and fuel taxes, as well as the Vat rate. “It’s going to be a mixture.”

Another possible target could be tax-exempt pension funds.

Dudley notes that the Davis Tax Committee (DTC), which was established under then finance minister Pravin Gordhan to assess the tax policy framework, had eyed the R2.2 trillion pension pot as a possible tax revenue stream.

“The DTC was of the view that concessions given to retirement funds, particularly the exemption from dividends tax, are possibly overgenerous in the context of the economic challenges facing the country. This is concerning for obvious reasons.”

She says this move looks unlikely as the DTC also said that taxing pension funds would be detrimental to low-income earners, who have a major portion of their wealth in them.

Another option

Rather than a wealth or pension tax, Dudley proposes a scheme mooted by Citadel where people can get a discount for paying capital gains tax (CGT) early.

“Owners of capital assets could elect to pay some capital gains tax on their as yet unrealised gains and rebase the base cost of the asset. This would work on a voluntary basis, and would allow those who have the liquidity to do so to prepay some CGT before they actually dispose of the asset and trigger the capital gain.”

Allowing this would not only provide the government with revenue collection and liquidity but also give it access to revenue without having to wait for taxpayers to dispose of the asset.