Taxing the wealthy to finance the economy and government programmes – will it happen, and can it work?

By: Stef Terblanche

On February 11, President Cyril Ramaphosa will deliver his state of the nation address (SONA) followed by Finance Minister Tito Mboweni’s Budget speech on 24 February. In the devastating context of the world’s major current black swan event – Covid-19 – South Africans should brace themselves for some more harsh realities and unpleasant shocks, wealthy South Africans perhaps more so than others.

As the government grapples with the escalating costs of the Covid-19 pandemic, the decimation of the economy, an extremely worrying debt burden, and enormous revenue losses, it is desperately trying to figure out where to find money and how to spend it wisely. It has taken a long, hard look at high-net-worth (HNW) citizens as a possible means to filling up its dwindling coffers in order to fight and address the impacts of Covid-19, revive the economy and continue driving its poverty-alleviation and development programmes. Topping the list of bills that have to be paid this year, is the national Covid-19 vaccine programme, with South Africa paying up to three times more than some other countries, thanks to bungled and belated procurement antics for which no-one has been held accountable.

The idea of a wealth tax is really nothing new and has long been a talking point in the socialism-infused, smoke-filled rooms of the governing ANC’s policy think-tanks. But it’s never before come to this point of seriousness and possible implementation. However, will it be implemented and can it work?

 Precarious tax situation

South Africa’s current precarious reality is that total gross tax revenue is now estimated to be R312.8 billion below the February 2020 Budget target. The pandemic and resultant lockdown measures resulted in immense revenue losses because of the alcohol and tobacco bans, other business-stifling restrictions, the overnight disappearance of the revenue generating tourism industry, a decline in personal income tax paid, business failures, and reduced VAT received because of a sharp decline in consumption, among others. At the same time stimulus, relief, rescue and Covid-combating initiatives – and a fare share of corruption – are eating up every cent. In response, the National Treasury says it plans to raise R40 billion in additional taxes over the next four financial years. What kind of taxes?

Talk has been rife in government circles of raising existing taxes, introducing a once-off ‘solidarity tax’, borrowing more money from institutions like the IMF, tapping into the pension fund industry (despite it too probably having suffered asset losses with the Covid crash), increasing VAT on certain items, raising inheritance tax (estate duty), increasing capital gains tax, or taxing the wealthy.

With no other obvious options seemingly available, it could well be one or more of these. Reprioritisation of existing government budgets is another option, but it’s slow, is resisted by key stakeholders, and carries a significant political and labour price, as last year’s attempts have already shown us. With more loans or the raiding of pension funds also meeting with resistance and plenty of red tape, it seems the tax environment may well be the inevitable option.

Increasing VAT or personal income tax or collecting a once-off special tax, seem to be a no-no as they will hit already seriously suffering middle to low-income earners the hardest. A wealth tax will affect, as its name implies, only the wealthiest South Africans who, the argument goes, can afford it without much pain. Tapping into inheritance tax or capital gains tax will in effect largely do the same as only the high-value assets of the rich will really deliver in significant numbers on this front, while minimum cut-off levels can spare the not-so-wealthy. But, with property values and JSE share prices also down, capital gains tax won’t yield much either.

The issue of a potential wealth tax has been extensively debated at Treasury, while respondents in a survey said they expect such a tax in the February Budget. One study claims it can contribute as much R160 billion a year to tax revenue, equivalent to 3.5% of GDP. For perspective, that’s considerably more than agriculture and equal to the construction sector. Some believe it will help narrow inequality in South Africa, the kind of argument the ANC likes to hear.

The threat of a wealth tax or other equally controversial measures should also be seen within the context of the approaching all-important local government elections and the ANC’s desperate need to improve its standing with the voters. This being an election year, the politics of opportunism and false promises will distort all other realities.

One should expect this year’s SONA to be much more of a Covid-19 situation report combined with an ANC election manifesto, than the normal standard SONA we are accustomed to. In the Budget there’s also going to be a lot of robbing Peter to pay Paul.

Massive revenue losses

Before Covid-19, South Africa’s economy was already in ICU. Now, with an economy further decimated by Covid-19, many government programmes directly affecting the lives of ordinary South Africans are struggling or are on hold. Addressing poverty, unemployment and inequality becomes near impossible and a political and economic luxury. And one of the biggest threats, directly threatening the ANC’s base, is the loss of some R313-billion in tax revenue. This means that the government’s social welfare safety net for millions of people, of an almost equal value as the revenue losses, is in perilous danger.

Government spends R309.5 billion on social security (last Budget before Covid relief aid) for more than 18 million dependent South Africans – 30% of the population – with around 50% of South African households receiving at least one form of social grant.

Following the horrendous degradation that occurred at the SA Revenue Service (SARS) in the last decade, new tax commissioner Edward Kieswetter and his team may start accomplishing some turnaround, but probably nowhere near enough, fast enough.

The governing ANC approaches the elections from the extremely low base of a very weak economy; high levels of poverty, inequality and unemployment; multiple exposures of theft and corruption in the ANC; increased suffering for so many through job, business and income losses because of Covid-19; unpopular lockdown measures that have curtailed personal freedoms; and many stalled government programmes. It desperately needs money to tackle these challenges and show some progress before voters go to the polls.

Goose that lays the golden eggs

Since well before the pandemic, but even more so now, some investment and wealth management specialists have been advising their clients to “diversify offshore”, or simply put, to take their money and run. If not all of it, at least significant sums.

The 2020 budget review tax table showed that South Africans earning more than R1.5 million per year were already paying R150 billion out of a total of R560 billion in personal taxes collected. Differently put, less than 1% of South Africa’s 60 million people were already contributing 27% of all personal taxes paid.

This is the most highly mobile segment of the population who by talent, skills, qualifications or wealth meet most countries’ immigration requirements. So, coming on top of South Africa’s many other well-publicised ills, touching their wealth is likely to result in instant flight… along with their money. The mantra by which the wealthy live is to grow and increase their wealth, and to protect and preserve it, not to give it away to governments known to excel in incompetence and corruption.

Some of our politicians may despise them and insult them at every turn, but these HNW individuals – and they are by far not all white – together with their wealth, are an indispensable and vital part of our economy on which we all depend. And when the occasion calls, they do give, as in billions donated to the national Covid relief programme, more than a wealth tax could have raised.

By the same token, 0.01% of the population own 15% of all wealth in South Africa. The top 1% own 55% of all wealth, and the top 10% control 86% of the country’s wealth. It can cut one of two ways: the wealthy can contribute more by way of taxes, but it may chase them away and leave a gaping hole. There’s a strong case for further tax reforms and a more balanced regime together with more egalitarian outcomes in the bigger socio-economic environment over the longer term. But equally, beware of killing the goose that lays the golden egg, or chase it away to foreign shores for dubious short-term gains.

Lacking capacity

Many eminent experts agree that a wealth tax simply won’t work, among them judge and tax reformer Denis Davis. The tax committee that he heads, previously reported that while a wealth tax may add to the legitimacy of the tax system in a highly unequal society, South Africa lacked the institutional capacity to administer it. Wealthy people have the money and access to good advisers and lawyers, and they know how to move money offshore or “hide” it in various tax-beneficial vehicles. South Africa simply does not have the sophisticated machinery to probe, monitor and access this wealth through a tax – it will take years to set up.

The ANC may see a wealth tax as a quick-fix option while it may also satisfy the ideological pundits of the ANC’s alliance partners. But it’s unlikely to provide relief in the immediate term, nor to significantly narrow the inequality gap over the longer term. Potential corruption may arguably be another persuasive disincentive.

This may inevitably leave us with the only viable alternative, and one that offers a sustainable long-term solution that could successfully underpin our status as a developmental state: dynamic structural economic reforms and a progressive new economic policy and strategy that is, for once, implemented. But that won’t solve the immediate funding needs of the government. And with the current administration better known for choosing the path of least resistance than making the hard choices and decisions, don’t expect too much from Ramaphosa and Mboweni. A wealth tax may well be their path of least resistance. We’ll find out soon enough.

Stef Terblanche is a Cape Town-based political analyst/consultant and journalist.