Wealth tax warning in South Africa

Nicholas Woode-Smith warns that increased taxes, including the ideologically motivated wealth tax, will further stifle economic growth.

The National Treasury is considering new ways to generate tax revenue as, despite a more efficient SARS, the government still has a R22 billion tax shortfall. 

Rather than focusing on creating wealth through sound economic policy, the government is fixated on further burdening the existing tax base with more taxes. 

Chief among these is the ideologically motivated Wealth Tax, Nicholas Woode-Smith, an associate of the Free Market Foundation, said. 

Woode-Smith explained that the National Treasury is already planning to drastically increase taxes, remove tax incentives, and enforce compliance in 2025. 

While the potential increase in the number of VAT zero-rated items may provide relief, the general increase in taxes will not help South Africans.

Increasing corporate income tax to 28% will only chase away profitable companies that are needed to create jobs and produce wealth. 

Woode-Smith said that the continued targeting of high-wealth individuals with even more taxes on their wealth, inheritances, estates and luxury imports would chase away these valuable taxpayers. 

Additionally, removing tax incentives like medical tax credits and well-earned tax breaks will not raise revenue. It will only make taxpayers more resentful towards the government and chase them away.

Woode-Smith explained that South Africa’s tax base is extremely narrow, with only three million people paying 90% of all personal income tax. 

This means that tax revenue is highly vulnerable to external shocks or individuals changing their tax residency as it is not broad-based. 

These three million South Africans are also heavily burdened with taxes on savings and investment and on most purchases they make. 

“We’re taxed for working. Our employers are taxed for allowing us to work. We’re taxed when we commute to work through the fuel levy. We’re taxed when we die, and our heirs are taxed again,” Woode-Smith said. 

The most heavily taxed South Africans already have to pay over 45% of their income. Woode-Smith said the government wants to increase this tax burden with a new wealth tax while reducing tax breaks.

A Wealth Tax has been under consideration in South Africa for some time, with the National Treasury analysing data from SARS to inform such a policy. 

In November last year, Chris Axelson, Treasury’s acting head of tax and financial sector policy, said SARS collected information on individuals holding assets valued at R50 million or more.

He said this information gives the National Treasury and SARS a better picture of the wealth within South Africa and a potential wealth tax.

The revenue service also established the High Wealth Individual Unit in 2021 to consolidate data on wealthy taxpayers through third‐party information.

“This will assist in broadening the tax base, improving tax compliance, and assessing the feasibility of a wealth tax,” the Treasury said.

Woode-Smith explained that the government’s obsession with taxing high-wealth individuals is fraught with ideological malic. 

“High-income earners already pay more tax than anyone else. That’s how percentages work. Even if a millionaire were to pay a 10% tax, they would still be paying more than the vast majority of South Africans,” he said.  

“A sliding scale tax rate, often called a progressive tax rate, is unequal and unfair and belies a complete misunderstanding of basic mathematics”.

This is merely a mechanism for the government to extract more wealth from their citizens than is fair and actively pushes the highest taxpayers to either minimise their tax burden or emigrate. 

Woode-Smith also explained that there is little evidence that increasing the tax burden on South Africa’s richest will help grow the economy and improve the lives of citizens. 

If anything, it will only shrink our growth prospects. Rather, we need to focus on producing wealth and growing the economy.

Instead of chasing a few wealthy taxpayers who can afford to emigrate, policymakers must focus on implementing free market-friendly policies that will lead to more people becoming taxpayers.