Picture: ISTOCK
Picture: ISTOCK

The Davis tax committee concluded five years of work and 25 reports on Thursday with a big one: SA is not ready or able to introduce a new wealth tax, and other avenues should be used to increase taxes on the rich.

The request to the committee to investigate a wealth tax was added to its mandate by former finance minister Pravin Gordhan in 2017, just as SA’s fiscal fortunes were in steep decline and the pressure to find more revenue was rising.

A wealth tax was also a measure that trade unions and civil society organisations have called for, for decades, as a way to address historical patterns of inequality.

Aware of these difficulties and political pressures, the report has been careful. It does not rule out a wealth tax at some point in the future, its main conclusion being that more preparation and research must be done before it can be contemplated.

It suggests that the South African Revenue Service begin by collecting information on taxpayers’ assets in preparation for a possible wealth tax in the future. But the implicit message throughout is that wealth taxes are more complicated than they look and are probably more trouble than they are worth, raising less than you would expect and costing more to implement.

SA is not ready or able to introduce a new wealth tax, and other avenues should be used to increase taxes on the rich
Davis tax committee

This is borne out by several international examples. Several countries — for instance India — that implemented wealth taxes have since abandoned them, having found that the cost of classifying and measuring net assets proved too expensive.

But in SA there is a particularly strong case to be made for a wealth tax. SA has a Gini co-efficient of 0.67 in income inequality. Among the 149 countries that the World Bank ranks for relative inequality, SA is the highest, followed closely by neighbours Namibia and Botswana. When wealth inequality is measured, the picture is even more unequal and SA has a Gini coefficient of 0.9 — higher than global inequality overall.

In the past few years, owing in part to the work of French economist Thomas Piketty, it is wealth rather than income that has been identified as the bigger culprit in fuelling inequality. In SA, this is overlaid with a history of racially based wealth accumulation. Not only do rich people stay rich because they inherit wealth, but white people, in general, stay rich, while black people, in general, stay poor.

This goes to the heart of what is at issue in SA’s political economy. The redistribution of land, which has become the central political debate, is a proxy for the wealth inequality question.

So to many a wealth tax looked like a ready-made solution and is a measure that would certainly win broad appeal. The committee’s recommendation against it will not go down well.

Importantly though — and before there is a popular uproar — the committee recommends that there are existing taxes, in particular estate duty, that can and must be used to tackle SA’s levels of inequality. Very little tax is actually paid through estate duty as there are a variety of ways to avoid tax — particularly the wide use of trusts — that have not been put under sufficient scrutiny. The recommendation is that the entire estate duty regime be reviewed to establish a more effective and equitable package of rates and abatements.

The committee also suggests dropping the spousal abatement, which allows for estate duties to be deferred until both spouses pass away, and suggests placing limits on donations between spouses. Treasury has already started down this path and in February raised the rate of taxation on estates that are larger than R30m. It also capped the amount that a person can contribute to a retirement fund, which was used as a way to avoid estate duties when death seemed imminent.

It is clear though that much more needs to be done. It is obvious that the tax system cannot do it all, and it is economic growth above all and a redistributive national budget that is well spent that can make a real dent in inequality. But SA is running out of time to effect meaningful and demonstrable change.

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