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Pay the taxman his dues

- Charlotte Mathews

A wealth tax could make a significant contribution to alleviating South Africa’s ailing fiscal situation.

Business, money and tax © Curiosity

For as long as most people can remember, the word that has tripped off the tongue of government ministers most often is probably ‘jobs’. Job creation, skills development, addressing extreme income inequality – together these make up the Holy Grail. Yet they can only be found in economic growth. 

Instead, for the past decade South Africa’s GDP growth has been well below government’s stated target of 6%, which is needed to dent unemployment. Unemployment has worsened dramatically as a result of the economic fall-out from Covid-19.

Over the years, government’s finances have deteriorated to a point where it is unable to meaningfully spend on social services or play a central role in infrastructure development, which is essential to economic growth. Government debt is now at 80.3% of GDP, and debt service costs are around 20.9% of gross tax revenue.

There’s a range of possible solutions, all of which have both positive and negative consequences. The National Budget presented in February proposed cutting government spending, while embarking on a programme of infrastructure investment in partnership with the private sector.

Fiscal dilemma

Michael Sachs, Adjunct Professor in the Southern Centre for Inequality Studies at Wits University, says that the crisis cannot be resolved solely by fiscal consolidation. The path of consolidation that the government is proposing to follow is so extreme that it is neither feasible nor desirable. An attempt at large fiscal adjustment is likely to impose unsustainable social pressures and choke off the recovery, imposing a second blow to livelihoods on top of the Covid-19 catastrophe. 

Without action to restore the regulatory, policy and institutional weaknesses that have debilitated the public sector, an infrastructure investment strategy is unlikely to succeed, says Sachs. But it will take time and effort to make these reforms. 

In the short term, the inertia blocking a resumption of growth can only be overcome with private investment in the lead, he says.

“First, the resolution of the fiscal crisis depends on faster economic growth, which will need to be led by private investment. Fiscal consolidation is necessary but debt will not stabilise without growth. Second, even if growth accelerates, the current structure of the public economy will have to change. This is likely to entail increased levels of taxation and reductions in public consumption.”

More taxes 

One of the proposed solutions to raising more tax revenue has been raised by Aroop Chatterjee, a Research Manager at Wits University’s Southern Centre for Inequality Studies, together with colleagues Léo Czajka and Amory Gethin. They propose a wealth tax, and in a joint paper discuss the various choices for designing it (including whether it is once-off, annual, or some other recurring period), each of which has its design benefits and disadvantages. 

They estimate that a progressive wealth tax, using conservative assumptions, levied on the richest 1% of South Africa’s population (about 350 000 people, who have net wealth of over R3.8 million) could raise revenue equivalent to between 1.5% and 3.5% of GDP. That is roughly two-thirds of what is raised from corporate income taxes or about 40% of what is raised from VAT.

“Depending on the extent of evasion, we estimate that a moderate wealth tax (with rates ranging from 3% to 7%) could raise about R70 billion to R160 billion.”

Specifically, it could start at a rate of between 1% and 3% of assets in the lowest band, rising to 3-7% in the middle band, and 3-9% in the top band. Those individuals with wealth below the first threshold would be exempted.

 “We believe that the tax should cover the top 1% of wealth owners, whose wealth mostly consists of tenant-occupied housing, pension assets, and bonds and stock. This ensures that they could easily find sufficient liquidities to pay the tax. Also notice that our proposal only taxes excess wealth above the threshold that we propose: this limits the well-known incentive to ‘bunch’ below the threshold,” they say. 

Critics of the proposed wealth tax have suggested that it would be complex to administer, beyond the current capacity of the South African Revenue Service, and prone to avoidance.

But Chatterjee says any administrative costs should be weighed against potential benefits – and in this case, the potential revenue is significant enough to warrant investment, if needed, in beefing up the capacity to administer.

“In terms of current capacity, SARS is already well placed. Crucial to administering any tax, especially for anti-avoidance, is the development of third-party reporting systems. SARS already receives third-party reporting from banks and financial services firms for current taxes. Only the information requested would need to be adjusted,” says Chatterjee.

“To improve this system, SARS is currently developing a Third Party Data Platform to accommodate bulk submissions of Third Party Data for certain types of taxes on the new Direct Data Flow channels. So collecting information on financial assets, which account for two-thirds of wealth, seems eminently practical.”

Chatterjee argues that all personal taxes suffer from tax avoidance, including the current personal income tax and other capital income taxes (for example, offshoring applies equally to income taxes as it would to a wealth tax).

“To reduce avoidance for personal and, especially, capital income taxes, the information and systems needed for a wealth tax will also help to reduce avoidance on other taxes.”

How quickly a wealth tax could be implemented only depends on the level of political and financial support to implement these systems, says Chatterjee.

More information

The following article was first published by New Frame (under a Creative Commons Licence):

  • Charlotte Mathews is a freelance writer.
  • This article first appeared in Curiositya research magazine produced byWits Communications and the Research Office.
  • Read more in the 12th issue, themed: #Solutions. We explore #WitsForGood solutions to the structural, political and socioeconomic challenges that persist in South Africa, and we are encouraged by astounding ‘moonshot moments’ where Witsies are advancing science, health, engineering, technology and innovation.