Wealth tax: More than just raising revenue in an unequal society
- Imraan Valodia and David Francis
It needs to be a socio-economic policy tool to effect a substantive change in wealth distribution.
The call by the Davis Tax Committee for public comment on the proposed wealth tax should have generated strident debate on the merits and practicalities, or otherwise, of implementing a wealth tax in SA. But the response, at least in the public domain, from civil society, business, academia and the general public has been rather muted.
In the coming months, the committee will have a lot to consider before it finalises its proposals on wealth taxes. It is important that, during this time, the public debate on wealth taxes continues. In brief, the committee proposed three additional wealth taxes for consideration and public debate. These are a land tax, a property tax (over and above municipal rates) and an annual wealth tax. What little debate we have seen has been rather muddled, often conflating what is just with what is practicable.
Here, we share some thoughts on both aspects. In this regard, it is important to address two questions: is the wealth tax required from a social justice perspective; and, if it is, can it be implemented?
The idea of a wealth tax, while not new, was recently brought to public light by French economist and author, Thomas Piketty. One of the key things Piketty has highlighted is how, under capitalism, wealth has become increasingly concentrated as it passes down from one generation to another — the so-called inter-generational transfers. We do not, unfortunately, understand inter-generational dynamics very well at all in SA. Much more work is required.
We do know, however, that inequality is worsening. The World Bank found that 58% of the income in the country accrues to the richest 10% of the population. But research by Anna Orthofer from Stellenbosch University has shown that inequality of wealth (as opposed to income) is far worse than income inequality. The newly available data suggest that 90% to 95% of all assets are owned by the richest 10% of South Africans, while the poorest 50% own no measurable wealth at all.
Piketty has found that, in developed countries, there have been sustained and substantial increases in wealth among the world’s richest individuals, and this has driven rapid growth in wealth inequality. Indeed, new data from the US shows the share of pre-tax national income for the bottom 50% of earners decreased from 19.9% in 1980 to 12.5% by 2014. In contrast, the share for the top 1% has almost doubled, from 10.7% in 1980 to 20.2% by 2014.
Furthermore, the share of national income from capital has risen from 6% in 1980 to 11% by 2014, while that for labour has only risen to 9.2%, from 4.7% in 1980 (New York Times, 2016).
SA is unlikely to be an exception to this trend, so these are good reasons for us to consider the issue of wealth and wealth taxes.
It seems trite to make the argument for why inequality is bad, but it seems necessary to do so. Much of the debate about the wealth tax is premised on the (often unstated) acceptance that inequality is a nuisance at worst, rather than, first, a socio-economic disaster in and of itself, and second, the cause of a much wider range of problems.
Indeed, in their recent, seminal work, The Spirit Level: Why More Equal Societies Almost Always Do Better, Richard G Wilkinson and Kate Pickett describe unequal societies as "dysfunctional". There is a mass of evidence that suggests unequal societies are more violent, slower growing and less content than their more equal counterparts. A wealth tax, if implemented to reduce inequality, could therefore be used as a growth-enhancing strategy.
Given that inequality is likely the single largest socio-economic problem facing SA, the question we must ask is: can wealth tax be an effective tool in addressing inequality? And in this regard, it is important to clarify the intention of the proposed tax.
Taxes can be used to effect redistribution of wealth and income, effect and change consumer and economic behaviour (think sin and excise taxes, and import duties on goods), and to raise revenue for government spending. Much of the commentary about the Davis proposal assumes that the intention of the proposed tax is to raise revenue. While the main objective should be to raise revenue, tax policy can also be used to achieve other economic and social goals.
In our view, the merits of a wealth tax do not lie only in its use for revenue raising, but as a socio-economic policy tool to effect a substantive change in SA’s highly skewed wealth distribution. And, let’s be honest: if we don’t start doing something about our high levels of inequality, we are heading down a path of more conflict and uncertainty.
The perceived problems with a wealth tax have been addressed, to some extent, in the press, and we will not re-state them here, except to address one conceptual point: arguments against a wealth tax do not offer an analysis of the counter factual — how does a society perform where additional social services are provided and where there is greater equality? What are the growth prospects of an SA where wealth is more evenly distributed, and there is greater equality in access to productive capital?
Furthermore, there is the persistent problem that income which can be transferred into wealth often escapes the current tax net, and this is a compelling argument for including wealth in the tax system, certainly from a tax equity basis.
The Davis Tax Committee will also have to consider some other aspects of tax policies in coming to a view on wealth taxes. Unfortunately, issues of equality and tax equity are not the only necessary condition for the implementation of a new tax.
A tax should also be efficient: that is, it should, at the very least, cost less to implement than it should raise in revenue. The problem we have is that wealth is so unequally distributed that a wealth tax is likely to impact on a very small part of the population. It is thus not at all clear that the likely revenue from wealth taxes will be sufficiently large to outweigh the costs of collecting them. Indeed, given the extremely high levels of inequality and the small numbers of potential payers of a wealth tax, we would have to demonstrate that it is worth having wealth taxes on strictly revenue-raising considerations. Once we are clearer on what taxes we want, these calculations will have to be done.
One way of solving the tax efficiency problem is to tax the wealthy at very high rates — to increase the revenue. But this generates all sorts of other issues. Taxes cause what economists call "behavioural effects" — people change their behaviour in response to a tax policy change. So, more complexities to think about.
The wealthy have numerous options for disguising or transferring their wealth to avoid taxes, and this can exponentially increase the cost of administering a wealth tax. On the other hand, taxes also need to pass the tax morality test: the public needs to believe the tax is fair and the revenue will be spent in a way that benefits society. Here one has to say that the shenanigans at the South African Revenue Services (SARS) and the "state capture" issues are not making the Davis committee’s tasks any easier.
There are a number of less ambitious solutions that could also be explored. For example, SA already has a property tax in the form of property rates leveled on all private property. This tax forms the fiscal backbone of local government, funding local infrastructure and services. One of the simplest ways to more fairly tax wealth is to ensure that the property valuation roll, on the basis of which local property taxes are levied, accurately reflects property values, which is far from the case at present, especially in areas re-zoned for commercial purposes.
A second option is inheritance tax reform. Inheritance taxes avoid many of the distortions of other wealth taxes because they are effected at the time of wealth transfer. Given that inequality is largely an inter-generational phenomenon, addressing inter-generational wealth dynamics is important, and here tax policy can play a significant role.
The committee has set out several key changes to estate duty, some of which are designed to enhance equity and tax progressiveness. The committee proposes increasing the primary abatement to R15m while increasing the estate duty rate from 20% to 25% on estates with a dutiable value exceeding R30m. It also proposes removing the inter-spouse abatements and allowances. And there are proposed changes to the treatment of donations tax and estates, to prevent the diminution of estates in anticipation of death.
We can also do a lot more to undertake additional research on these issues. We need, as Piketty and others did, to get more data to enable us to make informed, evidence-based decisions on wealth taxes.
Recent collaborations between SARS and academia are starting to show the exciting possibilities such data can provide. But in the same way that Piketty used data from the global north to bolster his theory of capital accumulation, we need similar analysis in SA.
Wits University is establishing the Southern Centre for the Study of Inequality, which will host a multi-year research project into inequality in SA and the global south. One of the project’s vital areas of study is a detailed examination of the dynamics of inter-generational wealth transfer and accumulation. Once we have a base of evidence on wealth dynamics in SA, policy makers will be in a far better position to assess the merits, and dangers, of tax policy reform.
Imraan Valodia is the Dean of the Faculty of Commerce, Law and Management, and David Francis is a Researcher in Economics at Wits University. This article was originally published on https://www.businesslive.co.za/bd/.