What the proposed wealth tax means for the economy

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FIFI PETERS: In today’s Personal Finance feature we are looking at the proposals around a wealth tax, because I think there’s no disagreement that South Africa’s social fabric of high poverty and inequality and unemployment is not sustainable. It needs to be fixed. But there are different views on how to go about fixing it.

Back in 2017 the ANC [African National Congress] first proposed an additional tax on the super-wealthy to form part of a funding scheme for the basic income grant that could potentially help level the playing field when it comes to inequality and poverty and unemployment.

At the weekend this proposal, the 2017 proposal, was essentially revived. To speak more about the economic implications of this I’m joined by Hugo Pienaar, the chief economist at the BER, the Bureau for Economic Research. Hugo, in your view sir, is this the way to go to solve the unemployment crisis, to fund the basic income grant – a wealth tax?

HUGO PIENAAR: Good evening, Fifi. We don’t think so. We think there are serious practical difficulties here.

At the end of the day, it comes down to a very narrow tax base.

If you look at the numbers from the National Treasury, the super-wealthy – well, their top category of income earners is people earning or that have taxable income of R1.5 million and above. Now there are 133 000 of those individuals in South Africa.

So already that gives you a sense that we are talking about, out of the population of 60 million, you have 133 000 of these people. So I think that the bottom line is if you want to raise R45 billion – which is the current cost of the social relief of distress grant per annum – you have to then tax R45 billion from 133 000 taxpayers.

So we think you are going to have a fairly exorbitant wealth tax on these people to raise that revenue – and that is likely to have behavioural implications.

In other words, people may simply vote with their feet and, for example, emigrate in order not to pay this tax. So we don’t think a wealth tax is a sustainable funding option.

FIFI PETERS: But in the ANC’s defence, they also say – the figure that they quote – the majority of the wealth of this country is in the hands of 5% of the population. They also say that’s not sustainable. What do you say about that?

HUGO PIENAAR: That is true, but there are other options here. Perhaps the first point to make is that South Africa, of course, already has a very progressive tax system. In other words the more you earn, the more tax you pay. So this will then make this tax system even more progressive. The point I’m making is that we are already in that realm of trying to cater for the poor, but there are other options.

The most direct one, of course, is to get the economy growing to create jobs, as opposed to paying handouts. Now that doesn’t happen overnight, we understand that. So there must be some interim measure.

But there are other tax measures that you can spread throughout the tax system – things like a Vat [value-added tax] increase. Now I know immediately you’re going to say, well, that hurts the poor the most. But again, the point is you don’t have to have an exorbitant increase in the Vat rate to raise the same amount of revenue because again, you spread this pain over millions of taxpayers as opposed to 100 000 taxpayers.

FIFI PETERS: That’s the same defence that the chair of the economic transformation subcommittee, Ma’am Mmamoloko Kubayi said, in the sense that Business Leadership South Africa, or business, is advocating or proposing an increase in Vat. She said exactly that – that this would put an extra burden on already stressed households.

I don’t know. How do we move forward here? Hugo, as you said, yes, the long-term ideal is you have an economy that is growing, that is able to create jobs. But for now, if the wealth tax is not the way to go according to yourselves and big business, if Vat is not the way to go according to the ANC and some of the representatives there, what do we do?

HUGO PIENAAR: Something has to give. If you make this expenditure permanent – currently it’s R45 billion per year, but the plan is to ratchet up that R350 amount to R460 or R500 over time, which will just add to this expenditure burden.

The Treasury has always said if you have a sustained increase in expenditure you can only have that if you have additional revenue. Just on the critique against Vat, we must bear in mind that there are a number of items that are zero-rated on Vat – in particular foodstuffs. Again, the poorest of the poor are already sort of insulated against an increase in Vat. So it would not be those individuals that are hardest hit by, for example, a Vat increase.

But I think the point we are just trying to make is you can’t throw all of this on a wealth tax. Vat, we think, will have – I always want to say, not even unintended consequences; it’s fairly obvious there will be consequences that will do damage to the economy if you go that route.

FIFI PETERS: I hear the argument around the poorest of the poor, and I hear what you’re saying there, but often people say we forget about the middle class, and the middle class is also having it pretty rough right now – the cost-of-living crisis as a result of inflation. We all know the high level of indebtedness that that class is also facing right now. So how would they stomach an increase in Vat?

HUGO PIENAAR: Well, you are right. But again, these are the trade-offs that one needs to make.

The other option, of course, if you don’t want to go there, there are three options.

You can raise taxes, which is not the preferable option, but it may be inevitable.

You can cut other expenditure, so you spend more on grants; but then you have to cut something somewhere else. That may also have adverse implications.

Or you can simply issue more debt or borrow the money to finance these expenditures. And again the financial markets may baulk at that; our interest rates may go up.

These are sort of your three options. The fourth option would be, as I said, to get a faster-growing economy, to get more people into the tax net –

FIFI PETERS: Hugo, unfortunately I’m going to have to cut you off there. I think we’ll [keep] talking about this. Hugo Pienaar is chief economist at the BER.

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