It’s going to cost Sars to put an effective wealth tax in place
A complex architecture is needed to ensure wealth is accurately valued — but that doesn’t mean we can’t make a start
There have been a number of recent calls for the introduction of a wealth tax as a form of social solidarity during the Covid-19 pandemic, to plug the fiscal deficit while reducing wealth inequality. Even before the coronavirus struck, SA was one of the most unequal societies in the world both in terms of wealth and income. This inequality is a direct, deliberate by-product of apartheid policies and, in the decades after democracy, policy implementation failure and state capture. These divides will inexorably be exacerbated during and after the pandemic.
It is important to note that the fiscal system is already highly pro-poor in relation to social grants, and progressive in relation to the tax system as a whole. Some forms of taxes on wealth already exist, by way of transfer duty, donations tax, property rates and estate duty. There is also a capital gains regime on financial assets and investments. Wealth taxes may increase vertical, horizontal and intergenerational equity, further enhancing the tax system’s progressivity. They could also improve tax compliance by providing useful information on assets, potentially reducing other types of tax evasion.
However, comparative international experience suggests dwindling support for wealth taxes as they have failed to realise their redistributive and revenue-generation goals. Switzerland has the highest tax take, at only 1.4% of GDP. An Organisation for Economic Co-operation and Development (OECD) review indicates a general move away from recurrent wealth taxes over the past four decades, with 14 countries (including Austria, Hungary, Iceland, Ireland, India and Germany) having scrapped this tax. By 2016 only five countries retained a recurrent net wealth tax.
In contrast to taxes on wealth transfer (such as estate and transfer duties), administrative costs in a system that levies taxes on net wealth holdings can be prohibitive. Tax authorities have found wealth taxes administratively onerous and costly to implement, for little revenue. Some forms of wealth are hard to measure (such as intellectual property, shares in unlisted companies and art) and other forms are easy to hide or convert into asset classes that fall outside the defined base.
The drivers for this administrative complexity include that high wealth individuals (HWIs) are internationally mobile, their assets often span several tax jurisdictions, they can afford to hire aggressive tax planners to avoid tax liability through sophisticated tax structuring and finance litigation for legal challenges, and their use of trusts and other corporate vehicles can obscure beneficial ownership. Automatic exchange of taxpayer information was until recently not available to tax authorities, and most have limited systems for data analytics to track assets and liabilities.
In March 2018 the Davis tax committee released its first report on the feasibility of a wealth tax. The committee was broadly supportive of investigating new forms of wealth taxation — in addition to closing loopholes in existing forms — but was circumspect given the administrative challenges in implementing such a tax, the limited success internationally in raising significant amounts of revenue, and the possibility of encouraging capital flight.
International experience suggests a viable wealth tax in SA would need to cover all asset classes and liabilities comprehensively (including those held by trusts, shell companies and offshore); have a sufficiently high threshold to avoid undue burden on the middle class, whose wealth comprises mainly institutional retirement savings; make extensive use of cross-border exchange of information; enforce exit taxes that disincentivise expatriation; provide payment options where taxpayers are illiquid; and not be vulnerable to undue litigation or judicial review.
For these reasons, the introduction of a wealth tax does not simply involve the press of a tax authority button. Much administrative preparation is required for effective, equitable implementation. Five critical administrative architecture dimensions should be considered:
- The legal framework. This should comprehensively cover all wealth components and require greater transparency and disclosure by taxpayers. Legislation will have to be complex, go through the appropriate parliamentary processes, and be open for comment before implementation.
- Technology architecture. Progress in implementing a net wealth tax will necessitate an integrated view of the taxpayer’s wealth. This must be underpinned by extensive third-party information reporting and signature of memoranda of understanding with a number of institutions such as the JSE, banks and municipalities. Such a system will have to be custom built for the SA Revenue Service (Sars). Critical here would be the use of big data analytics and other forms of artificial intelligence to drive reconciliations of statements of assets and liabilities, and risk engines.
- Valuations capability. All assets must be accurately assessed and values assigned. The basis of the valuation needs to be decided, as well as capability built to ensure these are credible.
- Auditing capability. High levels of compliance are supported by extensive auditing. This requires superior technical tax and forensic auditing capability, skills that are already in limited supply in the marketplace and would need to be ramped up at Sars.
- Institutional locus. Sars would need a fully resourced and highly skilled HWI unit as an institutional lever. Organisational stability and continuity in building a HWI team would be a prerequisite. The remit of this unit would include lifestyle audits of individuals who feature in high-profile corruption allegations, scrutiny of the tax affairs of random samples of residents of the wealthiest neighbourhoods and a thorough investigation into persons named in the Panama and Paradise Papers leaks.
Unlike other countries where wealth taxes are being advocated, Sars does not have the infrastructure in place to implement wealth taxes within a short time horizon. The scars of state capture, as laid bare by the Nugent commission of inquiry, have not fully healed. The requisite functional and technical skills to tackle aggressive tax planning and tax evasion have been severely depleted within Sars.
The organisation has already taken impressive strides to bolster its capability through the appointment of a more effective leadership, enhancing its data analytics and intelligence capability, and strengthening its ability to deal with the complex affairs of HWIs and tackle abusive transfer pricing practices. But given its journey back from capture to rejuvenation, at present Sars has to set priorities to match its still limited capacities and deal with accumulated backlogs in terms of combating heightened threats of VAT and customs fraud and base erosion/profit shifting.
That does not imply that nothing can be done in the interim. To the contrary, the Davis tax committee reiterates its recommendation that all personal income taxpayers above the filing threshold be required to submit a statement of all assets and liabilities. This data would inform a future decision about a wealth tax, and afford Sars and the National Treasury the opportunity to iron out definitional issues regarding the proposed tax base.
This step would not commit Sars to a wealth tax, nor would it foreclose the wealth tax option if it transpired to be feasible. Regardless of the wealth tax viability outcome, achieving a comprehensive view of wealth through mandatory disclosure of assets and liabilities would provide invaluable information to improve compliance and close the tax gap in respect of those HWIs who continue to evade their tax liability.
At the same time, Sars should invest in building its cross-border information exchange to develop an independent view of taxpayers’ offshore wealth holdings. Reconciliation of these two sources of wealth information could inform Sars’s future HWI interventions and risk management strategies and ensure that all taxpayers pay their fair share for post Covid-19 reconstruction and development.
• Prof Woolard is dean of the economics & management faculty at Stellenbosch University, Davis chair of the Davis tax committee and judge president of the Competition Appeal Court, and Ajam an associate professor in public policy, finance & economics at Stellenborch University’s School of Public Leadership.