Jashwin Baijoo of Tax Consulting SA considers the pros and cons of a wealth tax as a tool to address the huge wealth gap in South Africa.

The idea of a wealth tax has been bouncing around in South Africa for a long time, and it became a topic of wide discussion upon release of the wealth tax report by the Davis Tax Committee in March 2018.

In its final report, the Committee confirmed that empirical evidence shows that wealth inequality in South Africa is higher than the global average.

Clearly measures need to be put into place to address this issue, but is the idea of a basic income grant, funded by a wealth tax, the correct path?

The report mentioned the adverse impacts of imposing a wealth tax, stating “The adverse consequences of wealth taxation, such as capital migration, disincentives to save, the effect on entrepreneurship and employment must be thoroughly considered.”

Such a tax could well have a large impact on the already small South African tax base, with a knock-on impact of an increased unemployment rate for unskilled labourers, and some professionals.

The Committee suggested that although the purpose behind the proposed wealth tax is admirable, long-term sustainability must be considered. The proposed tax system must be designed in such a way so as to not be deemed prohibitive on wealthy individuals, and not exacerbate emigration rates in any way.

This will allow the proposed system to generate more revenue in the long run.

ANC wants to investigate a wealth tax

Fast forward to the 2022 ANC National Policy Conference, and Chair of the ANC’s economic transformation subcommittee stated that SARS should look into a wealth tax as a way of addressing the fact that “the majority of the wealth of this country is in the hands of 5% of the population.”

Step one in addressing this issue could be the permanent implementation of a basic income grant, as was used during the Covid-19 pandemic. This idea is supported by a study conducted by the University of Witwatersrand.

In the study, entitled Coronavirus: why South Africa needs a wealth tax now, it was speculated that “a wealth tax on the richest 354 000 individuals could raise at least R143 billion“.

This may sound like an astronomical number, but it is just the tip of the iceberg for the funds needed to even remotely start the wealth equalisation process in South Africa.

One point of concern surrounding the proposed new tax is that it could cause a mass exodus of the so-called high-net-worth individuals who would be the subject of such a tax.

The Bureau of Economic Research has claimed that the implementation of a wealth tax may result in the shrinkage of an already small tax base in South Africa, with these wealthy individuals emigrating to countries with lower tax.

The Bureau goes further, raising the concern that should a wealth tax be implemented, it would be done so at a high effective tax rate because the pool of individuals who qualify would be so small. This concern is shared by a number of independent economists and recent Intellidex reports.

While we all in theory understand the need to narrow the wealth gap in South Africa, we cannot deny that it is human nature to do what is best for oneself. This includes protecting hard-earned money against a tax which could be viewed as almost punitive in nature, or at least more punitive than the current bracket system of taxation in South Africa.

The Way Forward

A wealth tax may be for the greater good in principle, but we have to consider whether South Africa’s tax base can stand any further shrinkage that may be the unintended consequence.

The implementation of such a tax must follow a staged and calculated approach in order to promote the retention of contributing taxpayers and stem the flow of emigration.

This post was based on a press release issued on behalf of Tax Consulting SA.