Despite previously concluding that a wealth tax would not be appropriate for South Africa, the Davis Tax Committee, on 25 April 2017, released a media statement calling for written submissions on the introduction of the following possible wealth taxes in South Africa:
• A land tax
• A national tax on the value of property
(over and above municipal rates); and
• An annual wealth tax.

Whilst the term “wealth tax” may be new to many people (possibly due to the fact that there are very few countries in the world that currently levy such a tax), it is important to note that South Africa already has three forms of wealth tax, namely estate duty, transfer duty and donations tax. Equally important is the fact that these three forms of tax collectively bring in only 1% of tax revenue (a little over R10 billion a year). Some may argue that Capital Gains Tax is also a form of wealth tax however policy makers state that this is an income tax. Capital Gains Tax comprises approximately 1.5% of the total tax collections however this proportion is on the increase due to the inclusion rate being increased in recent years. Some would say that these meagre collections mean that these taxes cause more harm than good whilst others would argue that it means that the wealthy are still not being taxed enough.

The situation is thus one where South Africa sits in a position of remarkable wealth inequality however, proportionately little is collected in the form of wealth taxes year on year. Analysts in recent years have spent much time discussing countries’ Gini coefficient which measures the income or wealth inequality of a country’s population. Recent estimates from the World Bank put South Africa as the most unequal country in the world narrowly behind Namibia, Botswana and Haiti.

Statistics show that the poorest 20% of the South African population consume less than 3% of total expenditure,while the wealthiest 20% consume 65%. Policy makers see wealth tax as a means to redistribute wealth in a progressive manner thereby reducing the Gini coefficient.

When looking at the proposed taxes, one can’t help but be skeptical as to both their effect and practicalities. A land tax would likely be a tax on the land owned by a taxpayer, as opposed to the building on the land on which rates are levied. The purpose of the land tax would be to stimulate the production or redistribution of underutilized land. Most underutilized land is however already owned by the government with the remainder owned predominantly by commercial farmers.

Such a tax may therefore place further pressure on the agricultural industry and create a significant barrier to entry for new farmers. A national property tax (over and above municipal rates) would effectively follow the same valuation process as municipal rates i.e. the government decides on the value of properties using a mass appraisal system and applies a tax rate accordingly. This will likely have ramifications on municipalities’ abilities to collect rates which are already significantly under collected. Perceptions that a national property tax can be seen as double taxation are not unfounded and hence the resistance to such a tax will create practical issues when it comes to collection.

An annual wealth tax on the holding of wealth will be different from the current forms of wealth tax which apply to the transfer of wealth e.g. transfer duty, donations tax and estate duty. The tax would be levied on net wealth (assets) after the deduction of debt and liabilities. The measurement of the fair value of an asset that is being held and not sold will
always be a subjective exercise. The practical implementation of an annual wealth tax is fraught with difficulties such as the accurate measurement of assets and liabilities and the costs of implementing this tax will likely exceed the yield. In addition, a wealth tax of
this nature has been shown, in other countries, to encourage tax avoidance and evasion, incentivize a flight of skills and stifle growth as circumstances are created where assets need to be sold for liquidity in order to pay the tax due. We expect that there will be much
resistance to all three forms of proposed wealth tax with reasoning likely to focus
on the practical issues and shortcomings relating to measuring the fair value of assets year on year and evidence showing how wealth taxes have mostly been repealed in other nations due to their ineffectiveness. As this topic is debated, one cannot help but
be reminded of a famous Winston Churchill quote:

“I contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.”

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