Government policy documents circulated in 2020 point to the possible introduction of a new wealth tax in South Africa, known as a ‘solidarity tax’.
According to the documents, this ‘solidarity tax’ would target the country’s existing tax base and increase taxes for higher earners. This new wealth tax also aligns with comments made by the National Treasury in a parliamentary presentation in July 2020.
While it is possible that such a tax could be introduced in next week’s budget by Finance minister Tito Mboweni, this is unlikely, says Johann van Tonder, an economist at Momentum.
“There is not sufficient data on distributional household wealth levels in South Africa, and research on the topic is scarce,” he said. “Furthermore, there is no clarity on what wealth to tax, if it is to be taxed at all.”
Van Tonder said that household wealth comprises assets less liabilities – but some assets are already taxed. Assets consist of financial assets and non-financial assets such as residential property.
“Households already pay property tax to local governments, property transfer duties and capital gains tax. They also pay estate duties. So, a tax on residential assets may be interpreted as double taxation,” he said.
Similarly, he pointed to the fact that financial assets comprise deposits, retirement funds, investments and other assets such as life insurance.
“The problems with taxing the values of, for instance, retirement funds and investments are that these values change from day to day and sometimes are very volatile,” van Tonder said.
“For instance, South African household wealth declined by almost R1 trillion in March 2020, when the largest part of the world went into lockdown.
“However, by the end of the year, their wealth not only regained the R1 trillion, but added almost another R1 trillion.”
Van Tonder said that a number of other questions remain, including:
- Is it fair to tax life insurance? And, if so, what will happen to the life insurance industry?
- Will a tax on retirement savings negatively affect savings behaviour?
- How will it affect the savings industry in its entirety?
Distributional wealth research done by Momentum Insights in conjunction with Unisa also revealed that the highest income earners are not necessarily the wealthiest households, he said.
“Like in most countries, wealth inequality is high in South Africa. The research shows that although the 2% wealthiest households own almost 50% of the wealth, the 2% include a number of middle-income households.
“They decided to save and invest opposed to spend and borrow. Should they be taxed for doing the right thing? Contrastingly, a number of the high-income households had a negative wealth position, as their debt exceeded their asset values.
“So, a wealth tax will not be applicable to them if net wealth is to be taxed.”
These issues show that introducing a tax on wealth is not an easy exercise and deserves thorough research and economic impact studies before a decision should be made, said van Tonder.