Taxing the rich has a wealth of potential benefits

Raising the taxes paid by South Africa’s estimated 350 000 wealthiest individuals could deliver much-needed additional revenue to the state’s emptying coffers.

The Covid-19 pandemic has shown starkly how unequal the world is, and nowhere is that more evident than in the most unequal country in the world. In South Africa, just 1% of the population owns 55% of the wealth. Compare that with Russia, the United States, India and China, where the top 1% owns 43%, 39%, 31% and 30%, respectively.

Going beyond the 1%, South Africa had four US dollar billionaires in 2020 who owned 18% of all the wealth in the country, according to Forbes magazine. AfrAsia Bank and New World Wealth report that South Africa was home to 39 200 US dollar millionaires in 2018, who made up 0.11% of the population yet owned a combined 42% of the country’s wealth. Although the number of dollar millionaires had declined to 35 000 by 2020, the bottom 90% of South Africans own just 14% of the wealth in the country – and half of them are in debt.

On the opening day of the World Economic Forum in January, Oxfam International released a report called The Inequality Virus, which states that it could take more than a decade for the world’s poorest to recover from the economic impacts of the pandemic. In a press release accompanying the report, Oxfam said that the rigged economic system was enabling a super-rich elite to amass wealth in the middle of the worst recession since the Great Depression while billions of people were struggling to make ends meet.

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The Pietermaritzburg Economic Justice and Dignity Group has reported throughout the pandemic on the damage wrought by the economic impacts of Covid-19, especially on impoverished South African households. A report in January warned that withdrawing the limited government support to households, in the form of the Covid-19 relief grant, would have a severe impact on families.

“The vast majority of South Africans now face the second, and possibly third and fourth waves of Covid-19 with less money in our pockets than we had at the start of the pandemic in March 2020,” the group said. “We have no or little savings and almost no capacity to absorb shocks; we have lost our jobs, our wages have been cut, we work fewer hours. At the same time food prices, electricity prices and transport prices continue to climb.” 

Getting richer

Meanwhile, international media regularly reported throughout the past year how the world’s richest had significantly increased their wealth during the pandemic. According to Forbes, the 10 richest people in the world saw their wealth grow by $540-billion (about R7.95 trillion) between 18 March 2020 and the end of the year. And the Institute for Policy Studies, an American think-tank, has reported that the 600 richest US citizens have seen a wealth windfall of $1.1 trillion since the pandemic began, a 39% increase.

As the Covid-19 pandemic has worsened inequality, some nations have been considering new wealth taxes to raise funds to pay for the health and economic impacts of the virus. In December, both Argentina and Bolivia passed new legislation to collect a wealth tax from their richest citizens. 

Argentina launched a once-off “millionaires tax”, which targeted an estimated 12 000 individuals with personal wealth of more than $2.5 million. Bolivia’s wealth tax is annual and targets citizens with personal wealth above $4.2 million, which affects about 152 individuals.

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In anticipation of Minister of Finance Tito Mboweni’s release of South Africa’s annual budget on 24 February, the South African Federation of Trade Unions (Saftu) released a statement warning the National Treasury not to make the poor carry the burden of raised taxes. Instead it proposed taxing big business and the wealthy to raise government revenue.

Saftu president Mac Chavalala says that all the stimulus money the government has promised to plough into the economy since the pandemic struck is not new money, but rather comes from austerity measures. “They were cutting from this budget and that budget,” he said. “Mboweni will continue to do these things and this will place more pressure on the economy.”

He says Saftu supports a wealth tax as the country desperately needs revenue to fund education and health services and boost job creation, particularly among the youth. But, he says, one of the biggest obstacles to a wealth tax in South Africa is the lack of “political will” in the government to challenge big business. Saftu believes the private sector in South Africa is sitting on billions of rands as part of an “economic investment strike”.

To tax or not to tax

A report titled A Wealth Tax for South Africa that was released in January by the Paris-based World Inequality Lab argues that such a tax should be considered in South Africa, particularly in a time of economic decline caused by Covid-19. It says the pandemic will cause a decline in South Africa’s tax revenue collection of as much as 32% when measured against pre-pandemic levels. In this scenario, South Africa’s public debt is “likely to spike to hazardous levels”.

The report suggests that a wealth tax targeting the wealthiest 1% of the population – an estimated 350 000 individuals with a minimum wealth of R3.6 million – could bring in an additional R70 billion to R160 billion in state revenue.

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A wealth tax has been investigated in South Africa before. In 1994, the Katz commission found that the costs involved with collecting a wealth tax were too burdensome. And in 2018, the Davis tax committee found that South Africa’s wealthy were already taxed through estate duties, donations tax, capital gains tax and transfer duties. It argued that an annual wealth tax should not be added to these existing taxes as it could lead to double taxation, and therefore should only be used if it was more effective than the existing taxes.

Léo Czajka, one of the authors of A Wealth Tax for South Africa and an academic from the Louvain Institute of Data Analytics and Modeling, says the estimates show that the potential revenue collected from a wealth tax in South Africa justifies a further discussion of the matter.

He acknowledges that enforcing a wealth tax would be “probably difficult” but says that “simply assuming it cannot be put in place certainly discourages efforts to do so and may thus become a self-fulfilling prophecy”.

Co-author Aroop Chatterjee, an academic from the Southern Centre for Inequality Studies based at the University of the Witwatersrand, says “implementation” is always raised as a “prime challenge” to a wealth tax but shouldn’t be used to shut down a discussion about it. “Implementation challenges don’t nullify the use of a wealth tax,” he said.

How would it work?

A Wealth Tax for South Africa proposes a progressive tax that would target only the very rich in South Africa, and the richer they are the more they will pay. Wealth of between R3.6 million and R27 million would be taxed at 3%, wealth between R27 million and R119 million would be taxed at 5% and wealth above that would be taxed at 7%. 

This could bring in additional revenue of between R70 billion and R160 billion and the state wouldn’t have to increase its tax base to achieve these sums. However, tax avoidance, tax evasion and offshoring practices will result in significant amounts of wealth not being subject to the proposed wealth tax.

The proposed billions in additional tax revenue through a wealth tax is equivalent to 1.5% to 3.5% of South Africa’s GDP, or the equivalent of about 60% of all expenditure on social protection, including social security spending, all social grants and provincial social development. 

If the wealth tax managed to bring in R134 billion, this would equate to about two-thirds of corporate income tax revenue and about 40% of revenue from value-added tax. The wealth tax would collect about 20 times more money than transfer duties and as much as 60 times more than the estate duty. 

Answering the critics

The report says critics of wealth taxes who often argue that wealth should not be taxed because it would have a detrimental impact on growth are ignoring the fact that these concerns are true of all taxes. 

“Sharing resources through tax collection and expenditure is fundamental to guarantee the very existence and regulation of markets, to provide public goods which markets fail to produce, and to build elements of a welfare state allowing to pool idiosyncratic shocks nationwide. For all these reasons, the relevant general policy question is not whether taxes should be collected, but rather how much should be collected and how.” 

A Wealth Tax for South Africa also points out that there are many young South Africans with significant wealth indicating inherited money. In these cases, “we could argue that a wealth tax may be growth enhancing by inducing some younger cohorts to increase their labour income and create their own wealth rather than relying on capital income earned through inherited wealth”.

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The report further says that all asset classes, including property, pensions, bonds, stocks and wealth held in trusts, should be taxed so that the wealth tax doesn’t cause distortions in the market. Chatterjee says South Africa shows a huge concentration of wealth across all asset classes and that exemptions are often the reason for wealth taxes not being successful.

The revenue generated from the wealth tax could be put to use in growth-enhancing ways such as lowering public debt and reducing the effect of debt overhang caused by the Covid-19 crisis, says the report.

“Adequately used tax revenue can for instance help fund social transfers and economic assistance to individuals and firms most severely hit by the current economic downturn. The quicker vulnerable actors can recover from the shock, the quicker they can actively contribute to the economy again.”

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