Godongwana slams wealth tax in South Africa

Finance Minister Enoch Godongwana said income tax is the most effective way to tax the wealthy, and generates multiple times more revenue for the fiscus more efficiently and cost-effectively.

The minister said this in his response to a Parliamentary question from MK Party MP Sanele Mwali.

South Africa has toyed with the idea of implementing a wealth tax for years, with proponents arguing that it could address the country’s severe inequality.

This is because a wealth tax could lessen the tax burden on lower- and middle-income earners while increasing it on South Africa’s wealthiest.

However, critics of a wealth tax have argued that it would have the opposite effect, as high-income earners would simply leave South Africa in favour of a more tax-friendly country.

This debate was most recently reignited during discussions of South Africa’s 2025 Budget, as the National Treasury needs to find additional revenue sources without raising taxes.

Therefore, implementing a wealth tax has been floated as a potential option. Mwali asked Godongwana whether he had considered a wealth tax as an alternative to increasing the value-added tax, which the Finance Minister proposed in his first two 2025 Budgets.

In his response to this question, Godongwana explained that South Africa already has many instruments that tax wealth comprehensively.

This is done through a combination of taxes on property and other assets, including:

• Estate duty levied on all assets (financial, real estate and land) in a person’s estate at death 
• Donations tax levied on any asset donations
• All equity transfers are taxed through a securities transfer tax
• Real estate transfers through transfer duty
• In addition, all real estate (land and buildings) is taxed at the local level through property rates and taxes

Godongwana revealed that the total annual tax revenue collected from the four national taxes on wealth, excluding the local property taxes, amounted to R22 billion in 2021/22, R22.6 billion in 2022/23, R19.4 billion in 2023/24 and R21.3 billion in 2024/25. 

This is a contribution of 1.15% to total tax revenue, which compares favourably to the Organisation for Economic Co-operation and Development average of 0.5% for similar taxes.

Godongwana also pointed out that South Africa levies capital gains tax, which is essentially a tax on wealth gains. Capital gains tax contributed R15.6 billion to the fiscus during 2019/20, and R16.4 billion in 2020/21. 

In addition, a dividend tax and taxes on interest are also taxes on the returns from wealth. 

Why a wealth tax would not work for South Africa

Godongwana explained that, when evaluating the most comprehensive and efficient approach to wealth taxation, the following needs to be considered:

• The tax base of the high net worth individuals in South Africa is small and mobile.
• Initial data from the South African Revenue Service (SARS) indicates that there are 2,850 individuals with net assets above R50 million who have a total of R245 billion in local assets and R150 billion in foreign assets.
• This group pays R7 billion in personal income tax, and that revenue would be put at risk if they decided to change tax residency.

“Should this group decide to relocate, it would impact negatively on capital and investment flows, as they often have business interests which generate employment and contribute towards economic growth and capital formation locally,” the minister explained.

“International examples show that several countries have abandoned or significantly reduced the scope of their wealth taxes over the years as they were ineffective.”

Godongwana said only four countries currently have what can be termed ‘wealth taxes’. Other countries’ reasons for abolishing the wealth taxes are:

• The high cost of collection
• Administrative complexity
• Risk of capital flight
• Limited revenue gained from these taxes

Therefore, Godongwana believes income tax, rather than a wealth tax, is the most effective way to tax the wealthy. This is because it generates multiple times more revenue for the fiscus in a more efficient and cost-effective manner.

The minister referred to research conducted by the Organisation for Economic Co-operation and Development on the effectiveness of wealth taxes. 

This research found that a comprehensive income tax system, which also taxes capital gains, is more effective at generating revenue and redistributing wealth than taxes that specifically target the stock of wealth. 

“South Africa has a very comprehensive income tax system with progressive rates and high-income earners paying a top marginal tax rate of 45%,” the minister said. 

“In line with international best practice, South Africa levies capital gains tax to make its income tax system even more progressive and comprehensive.”

Another drawback of a wealth tax is that it could discourage savings in South Africa, which already has a very low savings rate. Godongwana said South Africa’s gross savings rate is only 13.7%, which is well below its peers. 

“Rather than save and add to South Africa’s overall savings pool (critical for investment and economic activity), wealthy individuals will rather consume their income or take it offshore,” the minister said. 

Godongwana warned that this would damage South Africa’s long-term development prospects.