Busisiwe Mavuso | Why a wealth tax is not the solution to help SA’s poor

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The unfortunate failure of successive administrations to produce an economic environment that is conducive to growth and job creation finds us in a situation today where urgent measures are needed to alleviate the suffering of the poor.

Our democracy started off brightly, with hope of a better economic future to accompany the political liberation. But then corruption, fuelled by cadre deployment, began to rear its ugly head and expanded to the point that it has become institutionalised. There are numerous other contributing factors to our economic woes but the damage wrought on state-owned entities during the state capture era left us with no ammunition for the exogenous factors such as the Covid pandemic.

As more and more government officials focused on the self-enrichment to which they deem themselves entitled, important areas of the economy are neglected as funding is subverted. For SA, this has been extremely damaging. Only last month did government finally approve a holistic plan to address the energy supply deficit when it was clear in the 2000s that it needed to do so. Similarly our water and transport systems have been neglected and require emergency reforms today.

Furthermore, national projects are determined by opportunities for personal enrichment rather than national interest. In SA, then president Jacob Zuma’s attempt to subvert regular approvals procedures and tie SA into a nuclear deal with Russia that would have cost an estimated R1-trillion is a clear example of this. While this particular misdeed was blocked, personal enrichment was put ahead of the national interest at most of our state-owned enterprises, particularly Eskom, Transnet, SAA and Denel.

The final trap to fall into is adopting populist mechanisms when the inevitable economic destruction is so overwhelming that it threatens the party’s electoral prospects.

And so the ANC passed a resolution at its policy conference at the weekend to introduce a wealth tax to fund a basic income grant (BIG) and reduce inequality.

“Tax the rich” is an enticing slogan. They’re fair game, after all, living in perceived opulence in the face of widespread poverty and besides, private sector wealth goes against the deeply ingrained communist-based ideology that the ANC was brought up on, particularly in its years in exile.

Given the suffering of South Africa’s citizens today because of decades of misgovernance both pre- and post-1994, we do need to do something urgently to address the plight of the poor. But you can’t base economic policy on slogans and business cannot support measures that would lead to further long-term economic destruction. That is why we commissioned a research report on funding options for a basic income grant which was recently released publicly. It’s important to identify unintended consequences in any commitment to funding the grant or indeed, any other expenditure programme.

The paper, researched by Intellidex, delves into the implications of raising taxes as one of three main ways to raise funds for a grant: cutting expenditure, raising debt and raising taxes. Each has complications but on the tax front, the core message from the research is that you don’t generate a “like for like” amount of extra revenue based on the percentage increase in taxation.

Some advocates of a basic income grant propose a tax of 1% on individuals whose net wealth is greater than R3.7m (about 350,000 people), plus a tax of 3% on the value of assets above R27.3m (the top 0.1% of taxpayers – about 35,000 people). These estimates are arrived at by assuming that the introduction of a wealth tax would lead to a 20% decline in share prices and that taxpayers would avoid/evade 30% of the taxes they should pay. However this does not take into account the wider impact of the fall in share prices.  It would create a cycle of share selling as sentiment worsened, driven by foreigners. Add to that the ability to shift assets offshore, the rates at which a wealth tax would have to be charged would likely have to go up each year as asset values fall.

There are other problems. Assuming that the above estimates are accurate, Intellidex’s research shows that the effect would be the equivalent of adding 14 percentage points to the effective rate of personal income tax on a small group of highly financially mobile individuals. There are also significant legal and administrative difficulties associated with implementing a wealth tax, such as determining which assets should qualify for taxation and which should not, how to assess their value, and how to apportion wealth holders’ debt to their taxed and untaxed assets. Additionally, even if a wealth tax was chosen it would take several years of policy work and then preparatory work by SARS before it could be implemented – while the demands are for a BIG now. Lastly, a wealth tax would create enormous distortions in investment decision-making as capital is shifted into asset classes that are not taxed or that are less easily taxed. This is why such taxes can create a sharp reduction in investment in the economy which is reliant on such capital.

Let’s be quite clear about this: there are no economically positive or even neutral tax increases possible in the foreseeable future.

Government has brought us to this point and now there are no easy solutions. Trying to pluck one out of the air without carefully considering the consequences will ensure it drives the economy to the natural end-point of its policies since 1994 – which leads directly to selling our sovereignty in exchange for an international bailout.

*Mavuso is the BLSA CEO. This article first appeared in Fin 24.

 

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