The ruling ANC wants to implement a basic income grant (BIG) and fund it through a wealth tax, but real-world examples and the Davis Tax Committee warns of unintended consequences.
The Covid-19 social relief of distress (SRD) grant has sparked a conversation about implementing a permanent BIG modelled after this grant.
“Work is underway to develop a mechanism for targeted basic income support for the most vulnerable within our fiscal constraints,” President Cyril Ramaphosa said in his 2023 SONA.
In the 2023 budget speech, R36 billion was dedicated to funding the extension of the SRD grant to 31 March 2024, but no mention was made of a BIG or how it would be funded.
At last year’s ANC policy conference, the ruling party said a BIG would be financed through a wealth tax, closing tax loopholes, addressing base profit shifting by corporates, and a transactions tax.
ANC head of economic transformation, Mmamoloko Kubayi, added that a wealth tax would be implemented to promote equity and raise revenue.
The wealth tax would possibly be linked to a land tax and, ideally, be aimed at the top 5% of high-net-worth individuals (HNWIs) and estates with significant assets.
Kubayi said a wealth tax “is the only acceptable option as an increase in income tax or VAT would weigh on already overburdened taxpayers”.
An Intellidex study from July 2022 estimated that a BIG could cost the country between R20 billion and R2 trillion annually.
It found that the following tax increases would have to be implemented to fund a BIG in South Africa:
- Personal income tax (PIT) would have to be raised by between 9% and 19%.
- VAT would have to be raised by between 14% and 29%.
- Corporate tax would need to be increased by between 24% and 47%.
South Africa already has a very small tax base. Only 7.4 million people in the country pay PIT, and only 1.1% of taxpayers pay 30% of the total PIT in South Africa.
Bureau for Economic Research economist Hugo Pienaar said there are only 133,000 super-wealthy South Africans with a taxable income of over R1.5 million.
He said this wealth tax would have to be exorbitantly high and may encourage wealthy individuals to leave South Africa.
If enough HNWIs emigrate, South Africa’s economic growth could be damaged and leave the BIG without any funding.
South Africa has an existing wealth tax implemented in the form of estate duty. However, the ruling party wishes to tax wealth more generally.
Currently, South Africa has a progressive tax system. This means the tax rate increases as an individual or company’s taxable amount or income increases.
Like a wealth tax, this type of taxation is aimed at redistributing wealth and promoting social equity.
However, case studies of wealth taxes worldwide show that these goals are not always achieved.
Case study: France
France imposed a wealth tax in 1998 to fund anti-poverty initiatives in the country.
This tax was called the ISF (impôt sur la fortune or “taxes on someone’s fortune”). An individual was taxed when their net wealth exceeded €1.3 million. Between 0.5% and 1.5% was levied on all net wealth above 800,000 Euros.
After this tax was imposed, France saw a sharp increase in the emigrations of wealthy taxpayers from the country. Around 60,000 millionaires left France between 2000 and 2016.
Many wealthy business owners also moved their businesses abroad, cutting jobs and lowering the country’s GDP growth.
The revenue the wealth tax raised was minuscule. The Financial Times reported that, in 2015, 343,000 households paid €5.22 billion. This equates to an average of about €15,200 per household – less than 2% of France’s tax receipts.
France’s wealth tax was abolished in 2017 by President Emmanuel Macron to stop the emigration of wealthy people and stimulate economic growth.
In its place, the French president implemented a flat tax of 30% on capital gains, dividends and interests, and a real estate tax.
“My predecessor taxed the wealthiest and those who succeeded like never before. What happened? They left,” Macron said in 2017.
“I will not give in to French jealousy because this jealousy paralyses the country. We cannot create jobs without entrepreneurs.”
Case study: Britain
Britain has never proposed a wealth tax, despite having promised to do so for years.
In 1974, the Labour Party committed to implementing an annual wealth tax to fund their other promises of increased pensions, a new child benefit, and reductions in public housing rents.
However, the Inland Revenue did not believe that the tax would raise enough revenue to fund the party’s new spending plans.
It did believe a wealth tax would reduce inequality, and Britain, therefore, imposed a top income tax rate of 83% and 98% on investment income.
These tax rates helped to reduce wealth inequality but also saw the era of the “Tax Exile”, during which notable people from the UK left the country to avoid paying taxes.
In 1976, the Labour Party abandoned their plans for a wealth tax.
Denis Healy, then the Chancellor of the Exchequer, said at the time, “We had committed ourselves to a Wealth Tax, but in five years, I found it impossible to draft one which would yield enough revenue to be worth the administrative cost and political hassle.”
Feasibility in South Africa
In 2018, the Davis Tax Committee published a report on the feasibility of a wealth tax in South Africa, which was presented to the former finance minister.
This report concluded that “while a recurrent net wealth tax may be an admirable and desirable form of wealth tax, more work is needed to ensure that the tax is well-designed and will yield more revenue than it costs to administer”.
Here are a few of the reasons the report does not believe a wealth tax is viable in South Africa:
- Negative real returns
The interest earned on South Africa’s cash and savings is often below inflation, and a wealth tax will worsen the real shrinkage of the country’s cash and savings.
A wealth tax could, therefore, diminish the country’s savings incentives and, by extension, the savings rate.
- Low revenue potential
As seen in the case studies above, a wealth tax does not generate enough revenue to make it viable. South Africa has a far lower wealth-to-income ratio than wealthy nations, meaning lower potential wealth tax revenue than income tax.
Wealth taxes are far more inconvenient for taxpayers than other forms of taxes. In certain cases, for example, servicing the tax liquidity may require a taxpayer to sell an asset to achieve the required liquidity to make the tax payment.
- High cost of compliance
Implementing and collecting a wealth tax can be expensive for taxpayers and the country. The report said administrative costs associated with tax collection are generally high for wealth taxes, as it requires inspection and valuation of assets.
In addition, the costs involved could lead to unequal treatment of taxpayers, as wealthy individuals can seek advice from tax experts on reducing their tax burdens or avoiding wealth taxation. The tax burden will, therefore, fall on the less wealthy.