DENNIS DAVIS: Why a wealth tax won’t work
Right now, there’s little scope to implement new taxes, including a wealth tax. Instead, we need to focus on policies that will answer SA’s deepest questions
No economy, whatever its growth path before Covid-19, is immune to the pandemic. But sadly not all economies are equal.
SA did not enter Covid 19 in robust economic health. The government’s own predictions luminously illustrated that the economy was already in the casualty ward. The 2020 budget (now irrelevant) predicted GDP growth of 0.9%, 1.3% and 1.6% over the next three fiscal years. Given an unemployment rate of 29% at the time, and with the government clueless as to how to accelerate growth, these figures painted a bleak future.
Then Covid-19 arrived. Now we’ll be fortunate to escape with a GDP decline of –7% and a tax loss of R300bn, compared to the 2020 budgeted figure. The tax collapse spells disaster for the state’s ability to maintain safety nets for millions.
The turnaround of the SA Revenue Service (Sars) under the leadership of Edward Kieswetter and a group of dedicated Sars officials may cushion some of the decline as it recovers after a period of institutional degradation. But this will not be sufficient to mitigate the huge decline of revenue.
The possibility of tax reform now is limited. As the Davis tax committee reported, while a wealth tax would add to the legitimacy of the tax system in a country with such vast inequality, it would require significant institutional capacity that can’t just be switched on like a light. It would require a dedicated team with the capacity to acquire detailed information about high net worth taxpayers, some of whom hold funds offshore through trusts, some of whom are adept at nondisclosure, and the details of many of whom Sars does not have on file. Steps should be put in place to make this happen — but it will take time.
A tax loss of R300bn spells disaster for the state’s ability to maintain safety nets for millions
Without the ability to implement a wealth tax, optimistic scenarios as to revenue that can be collected are simply guesswork.
The decline in the JSE and property prices means that revenue from capital gains tax will fall, no matter the tax rate. Collections from VAT and corporate tax will also fall. An increase in marginal rates from, say, R1m up, should be considered — but it won’t make a dent in the revenue needed to address a huge deficit.
Inevitably, it means the government has to borrow. While the conditions which come with loans are not likely to erode national sovereignty (as was the case with the International Monetary Fund until recently), money borrowed needs to be repaid.
But the capacity to repay loans depends on SA’s ability to discover a sustainable growth path — one which can produce far higher rates of growth than the tepid forecasts for the next three years.
For this reason, SA needs an economic policy that transcends the shibboleths of the past, which have done little justice to the aspirations of millions who continue to live on the margins of society after 26 years of democracy. A careful reading of Thomas Piketty’s new book, Capital and Ideology, may prove a useful starting point.
Piketty argues that an absence of a constructive egalitarian and universal political set of policies, which gave way to the conservative revolution of the 1980s and vastly increased the concentration of wealth and income in the first two decades of the new century, has fostered nationalist identity cleavages around the globe. "When people are told that there is no credible alternative to the socioeconomic organisation and class inequality that exist today, it is not surprising that they invest their hopes in defining their borders and identities instead," he writes.
A glance at Donald Trump’s America, with its profound inequality and egregious racism, should give us pause in SA. Hence, an economic policy that addresses the concentration of wealth and its perpetuation, the question of an absolute concept of ownership in a digital economy, the radical reconstruction of educational opportunities and meaningful land reform should be top of the policy agenda.
All of these questions are carefully examined by Piketty. His solutions may be controversial, but they are a start — which is more than presently appears on SA’s agenda.
- Davis is a judge and the chair of the Davis tax committee
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