South Africa’s big ‘wealth tax’ problem

The ruling African National Congress (ANC) has proposed that the government introduce a basic income grant in South Africa to tackle social inequality – and it wants a wealth tax on the country’s richest to pay for it.

However, National Treasury acting director-general Ismail Momoniat says that a wealth tax is simply not enough to achieve this, and doing what is necessary will have wide-reaching consequences.

Speaking at the South African Institute of Taxation’s (SAIT’s) Tax Indaba on Wednesday (7 September), Momoniat said that introducing a major step-change in expenditure – like introducing a basic income grant – will come with a significant trade-off.

For something that will cost the budget tens if not hundreds of billions of rands each year, the only tax sources available are corporate income tax (CIT), personal income tax (PIT) or value-added tax (VAT), he said.

“(A wealth tax) isn’t going to raise anywhere near the needed amount needed for (a basic income grant),” he said. “A wealth tax is a ‘now and then’ tax – not something you can tax every year. It’s only when people get the cash for their assets that we can tax,” he said.

This means that tax on wealth is not consistent and would only boost the coffers every two or three years when various calculations and audits are done.

Of the three remaining tax pools, only two end up being viable, and even then, trying to tap into them even further has dire consequences for the country.

“Corporate tax isn’t the way,” he said, noting that the Treasury cut corporate tax by one percentage point this year to encourage business. Raising CIT would put South Africa out of line with other countries and make it uncompetitive. “So it will always come down to PIT and VAT,” he said.

However, if the government taps into VAT, this affects poor households, going against the benefit of the grant. That leaves personal income tax.

Momoniat said that raising PIT would result in the richest paying more – but it will not only be the rich that are affected. “It will affect everyone: teachers, artisans, all low-paying jobs. That’s where the money (would) come from,” he said.

The government could avoid some of the damage to households by adding more exemptions and zero-rating VAT on more items – but he said this would ultimately undermine the reason for raising taxes in the first place.

Treasury does not have a position on the wealth tax, he said.

“What we try to do at Treasury is not to say this is our preference – we just say ‘these are the options’. But don’t expect a step-change in expenditure without a trade-off. And this kind of trade-off will affect growth and employment,” he said.

This does not mean that a wealth tax is out of the question, however.

“There’s a strong view that everyone must pay their fair share of taxes. And the wealthy should be taxed on their wealth,” Momoniat said.

The South African Revenue Service (SARS) has made its intentions regarding the country’s wealthiest taxpayers quite clear – it has established a special High Wealth unit to focus on the tax affairs of the rich while also strengthening its investigative capabilities to tackle ‘unexplained wealth’ in the country.

The tax collector is piloting new methods of taxing and tracking funds for well-off taxpayers, as well as new initiatives to test if it can use existing legislation to target unexplained wealth.

Momoniat said that Treasury is moving ahead with the Nugent Commission proposals, which will further strengthen SARS’ capacity.

The Nugent Commission made wide-sweeping recommendations to restore SARS functions that were gutted during the Zuma administration. This includes re-establishing compliance units, integrity units, litigation units and its capacity to track illicit trade.

Read: Warning over South Africa’s shrinking tax base