PETER DACHS: Why a wealth tax won’t work in SA

The ANC’s recent national policy conference revealed that some members still favour some form of wealth tax to fund a basic income grant. It has been reported that the party has revived plans to introduce a tax along these lines, a proposal that was initially made at the party’s 2017 national conference.

In SA income inequality is high and persistent. Inequality is complex and multidimensional. It is commonly separated into two categories: inequality of opportunity, including income inequality; and inequality of outcome, which incorporates wealth inequality.

Since inequality can be measured in different ways, a variety of indicators should be used to obtain a meaningful and accurate picture. For instance, in 2014 the richest 10% of the population earned about two-thirds of the total national income in SA. This indicator explains why SA was identified as an “extreme inequality regime” in the 2018 World Inequality Report.

However, wealth inequality, which refers to the unequal distribution of assets owned by individuals or households, is even more concentrated than income inequality. Stats SA figures show that the richest 10% of the population holds about 95% of all wealth in the country.

Various countries with significant wealth disparities such as ours have considered the introduction of a form of wealth tax. The idea is that this would assist in closing the wealth gap. “Tax the wealthy” is a widely heard populist refrain. Its proponents argue that the wealthy can afford an extra tax and that the amounts collected could make a significant difference in reducing the tax shortfall that is caused by, among other things, a weak economy.

However, there are many challenges in respect of a wealth tax. First, direct taxes are generally imposed on income earned (received or accrued) by a taxpayer or on capital gains arising from the disposal of an asset. A wealth tax would not be triggered by income earned or capital gains arising from the disposal of an asset. Instead it may be levied on some concept relating to the value of a person’s estate.

The question arises how such a person would fund this tax. The taxpayer is likely to have to dispose of assets or borrow money to fund this new tax liability. While estate duty is a form of wealth tax, it is imposed on the death of the taxpayer when there is a deemed disposal of the relevant assets held by the deceased.

A difficulty with imposing a tax on unrealised gains is that asset values are often volatile and, as we have seen during the course of this year, stock markets around the world have shown significant decreases in value over the past eight months. The S&P 500 index has lost 15% year to date, while the JSE all share index is down more than 10% in the past six months. This makes it difficult to calculate the value of a particular individual’s assets. This difficulty is even more pronounced when such individuals are not invested in asset classes with a publicly available price.

Beneficiaries

A question also arises as to how the relevant taxpayer’s wealth arose. If a wealth tax is based on notions of equity, perhaps it should make a difference whether the taxpayer built up a business empire that employs thousands of people, all of whom pay tax, for example, as opposed to a taxpayer who accumulated wealth by shipping jobs offshore.

An elephant in the room in relation to a wealth tax is the use of trusts. Trusts are prevalent in common law jurisdictions such as SA. The many reasons for setting up a trust include asset preservation, limiting the likelihood of insolvency, administration of assets by professional trustees, and providing for distributions to various family members on a discretionary or vested basis.

The imposition of a wealth tax on trusts would be extremely difficult. The trustees hold assets for the benefit of the various beneficiaries of the trust, some of whom may not meet any criteria relating to the imposition of a wealth tax. The beneficiaries may also be discretionary and may therefore not receive any distributions from the trust. The class of beneficiaries may change over the lifetime of the trust. The question arises whether it is worth devising a complex new wealth tax if it can realistically be imposed only on individuals.

In addition, trusts are sometimes used to hold business assets. Why then should a trust suffer wealth tax and not, for example, a company? It seems difficult to include trusts in any wealth tax regime, but to exclude them is likely to significantly reduce the efficacy and fairness of any wealth tax.

It may be that before looking at complex new forms of taxes such as a wealth tax in SA we should first look at closing the tax gap by ensuring greater levels of compliance with our existing tax laws.

• Dachs is a tax director at ENSafrica. He writes in his personal capacity.