Experts at Tax Consulting South Africa warn that the ANC’s renewed stance on taxing the country’s wealthiest people to fund basic income subsidies could drive them offshore, further straining the tax base.
At the party’s political conference held at the end of July, the ANC stated that a wealth tax is the preferred option to fund a basic income grant in South Africa, with delegates pointing to the country’s top 5% of earners who own “most of the wealth”.
“Most of the wealth of this country is in the hands of 5% of the population. It is not so. We will have to consider the SARS (wealth tax),” the party said.
The announcement, which is the first step towards establishing a permanent basic income subsidy, is supported by research conducted by the University of the Witwatersrand, according to Tax Consulting.
The study, titled “Coronavirus: Why South Africa Needs a Wealth Tax Now”, suggests that “a wealth tax on the richest 354,000 people could raise at least R143 billion”. To fund the ANC’s proposed basic income subsidy of 350 rand for unemployed adults, the state only half of that will be needed.
However, tax experts have warned that even though the 143 billion rand seems like a staggering sum, it is far from addressing the deep inequality that persists in South Africa – and could end up doing more harm than good.
In a note released this week, the group said one of the main concerns with the proposed wealth tax is the exodus of “high net worth individuals” who would be subject to such a tax if it were introduced.
The Bureau of Economic Research (BER) has also supplied that the introduction of a wealth tax could further reduce South Africa’s already small tax base, with wealthy individuals opting to emigrate to lower tax jurisdictions.
“The BER goes further, as evidenced by a number of independent economists and recent Intellidex reports, raising concerns that if a wealth tax were to be introduced it would do so at a high effective tax rate due to the pool of eligible individuals being so small” – Tax Consulting said.
“The idea behind the wealth tax is to correct financial inequality in South Africa. (But) it is human nature to do what is best for oneself. This includes protecting hard-earned money from a tax that can be seen as almost punitive in nature, or at least more punitive than the current system of taxation in South Africa,” the group said.
The call is coming from home
Warnings about capital flight through emigration also come from the same committee that recommended it be investigated, Tax Consulting noted.
While the idea of a wealth tax was originally mooted many years ago, it has become the subject of much debate following the release of the wealth tax report by the Davis Committee on Taxation in March 2018.
In its final report on the feasibility of the proposed wealth tax, the committee confirmed with empirical evidence that wealth inequality in South Africa is higher than even global wealth inequality.
However, the report mentions the adverse impact of the introduction of a wealth tax, with the report stating: “Negative effects of wealth taxation, such as capital migration, disincentives to save, impact on entrepreneurship and employment, should be carefully considered.”
The authors said this would have a large impact on an already small tax base, with the added impact of raising unemployment rates for unskilled workers and some professionals who depend on the sector.
“The Davis Tax Committee suggested that while the objective behind the proposed net wealth tax is admirable, long-term sustainability needs to be considered. This suggests that the proposed tax system should be designed in such a way that it is not seen as prohibitive for the wealthy and does not in any way worsen the level of emigration,” said Tax Consulting.
“This will allow the proposed system to generate more revenue in the long term than the cost of administering it.”
Tax experts said a wealth tax could do more good, but the rollout should be phased and calculated to help retain taxpayers and stem the flow of emigration in favor of more easily digestible taxation.
Read: Proposed wealth tax could push South Africans to emigrate, economists say