How a possible wealth tax in South Africa could work

A government policy document seen by Bloomberg this week points to the possible introduction of a new wealth tax in South Africa, known as a ‘solidarity tax’.

This ‘solidarity tax’ that would target the country’s existing tax base and increase taxes for higher earners. The introduction of a new wealth tax align with comments made by the National Treasury in a July parliamentary presentation.

At the time, chief director Edgar Sishi said that National Treasury is considering a number of new tax measures as the government seeks to raise an additional R40 billion through hikes in the coming years.

In his presentation, Sishi said that Treasury was considering research reports from the Davis Tax Committee on the possible introduction of new measures, including the viability of a wealth tax and how it relates to a land tax and estate duty.

“We are looking at these recommendations. It is important to remember that tax amendments over the last five years have included some of these proposals and we are looking at additional proposals for the 2021 budget.”

Wealthy targets 

Samantha Lance, fiduciary partner at Citadel Fiduciary, says that South Africa already has a long history of wealth transfer tax in the form of estate duty, donations tax and capital gains tax, but there has never been a tax on the net wealth holdings of individuals.

“Experience, though, has shown that wealth tax does not always meet its goals and several countries have introduced a wealth tax only to abandon it some years later.

“With experience under the belt, most countries have rather levied a wealth tax as a crisis measure to generate additional revenue in the face of an economic setback, but the tax usually has a short lifespan.”

Lance said that a solidarity wealth tax will likely apply to people such as dollar-millionaires and other high-net-worth individuals.

The exact definition of who falls into this category could be expanded – but it remains unclear at this stage, she said.

Aroop Chatterjee, research manager: Wealth Inequality, Southern Centre for Inequality Studies at the University of the Witwatersrand, proposed the following sliding scale:

  • All wealth between R3.6 million and R27 million to be taxed at 3%;
  • All wealth between R27 million and R119 million to be taxed at 5%;
  • All wealth above R119 million to be taxed at 7%;
  • Individuals worth less than R3.6 million would be exempt.

Speaking to MyBroadband, Efficient Group chief economist Dawie Roodt said the effectiveness of tax increases will depend on the kind of tax; how long it will be implemented; and what the rates will be.

If, for example, there is a once-off big personal income tax “surcharge” in one month, then it will be difficult to put measures in place to avoid the tax and much of it will be collected.

If, however, it is a smaller percentage increase over time, then it will allow for time to evade such a tax and it could well result in less tax collection – which is already the case.

“The bottom line is that, at best, extra revenue can be gained only in the short term. Over a longer-term, chances are that less will be collected,” he said.

Economist Mike Schüssler said that the South African tax burden is already very high and that additional taxes may prove unsustainable.

He said that personal income taxes to GDP are also one of the highest in the world, while VAT revenues are in the top half of countries. “This is unsustainable as the people who pay taxes get very little in return – they have seen the wastage, corruption, and high government salaries,” Schüssler said.

He said increasing taxes further will result in people looking to get out of South Africa or working less.

Read: Treasury and SARS outline new tax changes for South Africa

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