Taxing South Africa’s rich will only chase them away

With a massive tax shortfall in South Africa, new ways of drawing in revenue for the fiscus are being considered, including a wealth tax which has re-ignited the debate on the taxation of high net-worth individuals (HNWI), says Ruaan Van Eeden, MD of tax and exchange control at ‎Geneva Management Group.

For many taxpayers around the world, progressive taxes – in which the more one earns, the higher the rate of taxation – contradicts the principal of equality.

“In fact, it is this thinking that is behind the recent tax amendments in the USA, where the passing of new legislation will attempt to ease the tax burden on many of the country’s wealthiest, coupled with a reduction of corporate tax rates,” Van Eeden said.

He noted that South Africa is one of the top 20 highest overall tax-to-GDP countries in the world, and this situation could well intensify if additional wealth tax measures are introduced.

“For instance, the maximum South African tax rate has been increased from 41 to 45% and applies to those who earn over R1.5 million a year. The Davis Tax Committee has also long advocated for increases in dividends tax, capital gains tax and transfer duties,” he said.

The tax expert said that there is general discontent among HNWIs in the country who feel that they are potentially being unfairly targeted by tax authorities looking to increase tax revenue without focusing on expanding the tax base, per se.

“In fact, the small size of the income-tax-paying population in South Africa relative to the number of beneficiaries creates a vulnerable situation for the country through, for example, a potential flight of capital arising from emigration or seeking alternative tax residency in a more favourable jurisdiction – the effective capital gains tax rate of 18% on exit appears to be a price worth paying for HNWIs in the current environment.”

Van Eeden said that higher taxes do not necessarily have to equate to an unhappy tax-paying population. Denmark is a case in point. Here most of the population pays 45% income tax, and the wealthy are subject to an additional 7%.

“But, Danes are among the happiest people in the world. There is strong support for the welfare state in the aforementioned scenario, because they value the fact that their taxes are an investment in their society which gives citizens a good quality of life.

“Granted, the socio-economic and political climate is vastly different to South Africa, however, getting value for the taxes you pay is pretty much a universal expectation,” he said.

Higher rates of taxes for HNWIs is common in many countries and, in some, additional tax revenue is derived from the imposition of a wealth tax. Generally, where wealth taxes have been introduced, they are not successful since they are introduced for political, rather than economic reasons, Van Eeden said.

He said that if the purpose behind higher taxation of the wealthy is to address inequality, this should be thought through with care. An analysis of the underlying causes of the inequality is crucial because that approach will determine whether the solution lies in taxation of one group in society to benefit others.

“In South Africa, there clearly is a need for more people to become economically engaged and so to increase prosperity among a wider group of citizens. This will automatically increase the tax revenue in the country. But the means of reaching this goal cannot rest only with higher taxation of HNWIs – other ways of stimulating prosperity must be applied.

“While the taxation of the wealthy in South Africa is high, it is not the highest in the world. However, the balance between higher taxes and an appreciation of the benefits that this brings is not evident to the South African HNWI, and so this approach is neither desirable nor sustainable,” Van Eeden said.

Read: Wealth tax and VAT hike being considered – here’s what you could be paying: report

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Taxing South Africa’s rich will only chase them away