New proposed tax can chase wealthy people out of South Africa

The government is considering a wealth tax to increase revenue and plug the Budget shortfall, but this would drive rich people and businesses out of the country.

On Tuesday, 25 February 2025, BusinessDay reported that introducing a wealth tax is one government proposal to address South Africa’s Budget shortfall.

Finance Minister Enoch Godongwana’s 2025 Budget, which was set to be tabled on Wednesday, 19 February 2025, revealed South Africa’s dismal financial situation.

He wanted to increase value-added tax (VAT) by two percentage points to raise an additional R58 billion to fund increased spending.

This money is needed to fund public sector wage increases, expand early childhood development, and retain teachers and doctors.

The money was also earmarked to revitalise the commuter rail system and provide above-inflation increases to social grants.

However, the VAT increase proposal received such strong opposition from cabinet members that Godongwana postponed his Budget speech until Wednesday, 12 March 2025.

He explained that this postponement will give stakeholders time for further deliberations within the Government of National Unity (GNU).

It was widely expected that the Finance Minister would have no other option than to cut spending to prevent South Africa’s finances from deteriorating further.

Efficient Group chief economist Dawie Roodt said, at long last, the state will be forced to cut spending, which was a good thing.

Roodt added that South Africans are already overtaxed, and trying to raise the personal income tax or company tax rates is not realistic.

He highlighted that South Africa is already on the wrong side of the Laffer curve, which means raising these taxes will not generate more revenue.

South Africa’s highly concentrated taxpayer base means that the government must approach personal and company income taxes with caution.

However, BusinessDay recently reported that the government is considering a wealth tax to generate additional revenue.

It cited three senior officials who said the wealth tax proposal emerged at a special cabinet meeting on Monday, 24 February 2025.

A wealth tax for South Africa has been looming in the background for years. However, it has never been implemented due to the risks it poses.

A wealth tax will chase rich people and companies out of South Africa

Numerous studies have shown that a wealth tax causes significant damage as it chases rich people and companies out of a country.

A wealth tax is an annual tax levied against the market value of net assets owned by taxpayers. It can be levied against both natural and juristic persons.

It has been considered in South Africa for some time, and the National Treasury has already analysed SARS data to inform such a policy.

In November 2024, the Treasury’s acting head of tax and financial sector policy, Chris Axelson, said SARS collected information on individuals holding assets valued at R50 million or more.

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.

A wealth tax has populist appeal but comes with many problems, including being difficult to execute, damaging the economy, and raising little revenue.

Minerals Council chief economist Hugo Pienaar said there are only 133,000 super-wealthy South Africans with a taxable income of over R1.5 million.

Trying to raise R45 billion for basic income grants from 133,000 wealthy taxpayers will require an exorbitantly high tax.

Such a high tax will encourage many wealthy individuals to leave South Africa and move their businesses to more tax-friendly countries.

Furthermore, these individuals already shoulder a hefty tax burden as South Africa has a progressive tax system.

The most heavily taxed South Africans already have to pay over 45% of their income, and a wealth tax would only add to this burden.

Free Market Foundation associate Nicholas Woode-Smith explained that only three million people pay 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 taxed on savings, investments, and most purchases.

“High-income earners already pay more tax than anyone else. That’s how percentages work,” he said.

“Even if a millionaire were to pay a 10% tax, they would still be paying more than the vast majority of South Africans.”

Problems with a wealth tax

The Helen Suzman Foundation released a series of reports on the impact of a wealth tax in South Africa.

It highlighted that wealth taxes can be seen as an intrusion on private property when compared to income taxes.

“With wealth taxes, the government has a claim against a taxpayer’s net assets, no matter whether the assets have generated an income or not,” it said.

The biggest problem is that rich people can migrate to countries with lower tax rates, which has happened in many countries that introduced wealth taxes.

A good example of this was seen in France in 1982 when the country introduced a progressive wealth tax of 1.5% on assets above 10 million francs.

After a political change in the country, it was repealed in 1987. However, it was brought back in 1989 in modified form with a 1.1% tax on assets above 20 million francs.

In 2018, France scrapped wealth taxes on everything except property assets as it had unintended consequences.

A 2008 study found that France lost around €5 billion in tax revenue a year because of people leaving to avoid the wealth tax.

The study further revealed that the capital flight associated with the wealth tax could cost at least 0.2% of annual GDP due to a decrease in investments.

Since 2000, France has experienced a net outflow of around 60,000 millionaires, with departures accelerating due to the unstable nature of the wealth tax.

Many other countries also introduced wealth taxes only to abolish them due to their adverse effects.

Swedish wealth taxation was introduced in 1911 and abolished in 2007, and Indian wealth taxation was introduced in 1957 and abolished in 2016.

Germany abandoned its wealth tax in 1997 due to high administrative costs, low revenue, problems with asset valuation, and the liberalisation of capital flows.

The same happened in Ireland, Slovenia, Spain, Finland, Denmark, and Austria, which shows that wealth taxes can be ineffective and damaging.

For South Africa to go down this path can be extremely harmful, considering the country’s already highly concentrated tax base.