A wealth tax may be the fastest way to plug the holes in the government’s finances and pay for additional costs including Covid-19 vaccines, but it is not sustainable, says chief executive of Momentum Consult, Hannes van den Berg.
Van den Berg said that a wealth tax is a short-term tool to fix a long-term problem.
“It’s a fast way to fill the holes that have been left by the mismanagement of public funds, but it’s not a lasting solution,” he said. “South Africa has a relatively well-developed tax regime which resembles those in first world countries. The problem is our dwindling individual taxpayer base.”
The tax statistics for 2020 show that there are 4,337,923 individual taxpayers in South Africa.
Burdening the wealthier segment further risks driving them away – whether this is down the path of tax resistance or emigration, he said.
“The level of tax is so high that people are either looking for other, often riskier, ways to mitigate their tax burden or they avoid paying tax altogether,” van den Berg said.
He also points out that in a capitalist system, those willing to risk their capital for the country’s growth would reasonably expect some return.
“However, if they are taxed to the point of no return, they can easily lift their roots and find their successes in another country,” he said.
The ‘brain drain’ is a very real threat, he said. Prohibitively high levels of tax is fast becoming a major reason people leave the country.
“This is evident in the rising number of questions about offshore structures and tax havens that Momentum Consult is receiving. Neither tax avoidance nor emigration are helpful for economic growth. And with job creation facing an uphill battle, the number of individuals who can be taxed will be spread even thinner.
“You simply cannot tax a country into prosperity. It’s like Winston Churchill once said – 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.”
He said that the level of tax is so high people simply don’t want to, or can’t, comply. They are intentionally avoiding tax or looking to options like e-currency to circumvent tax measures.
“And as we’ve seen, these come with many risks to well-meaning people who panic and move their money into risky ventures, often paying a high price.”
Declining tax base
SARS commissioner Edward Kieswetter noted the revenue service’s concern for an increase in retrenchments, lower-wage settlements, reduced bonus payments and a slower growth in consumer spending in October last year.
Of particular concern is that SARS tax directives for retrenchments in 2019/20 reflected a total of 287,000 versus 239,000 for the prior year.
This signals an erosion of the tax base, especially for PAYE, as the 287,000 represents a number of PAYE contributors that will are likely not to contribute to the FY2020/21 tax base unless reabsorbed into employment, SARS said at the time.
Pay-as-you-earn tax (PAYE) refers to the tax required to be deducted by an employer from an employee’s remuneration paid or payable.
Global citizenship and residence advisory firm, Henley & Partners meanwhile, highlighted a steady growth in investment migration locally as a result of increased volatility driven by Covid-19.
The group’s South Africa office recorded a 48% increase in the number of enquiries about Citizenship-by-Investment programmes between the first and third quarter of 2020.
“Many are taking stock and ensuring they are better prepared for the next pandemic or major global disruption. The relentless volatility in terms of both wealth and lifestyle has resulted in a significant shift in how alternative residence and citizenship are perceived by high-net-worth investors around the world,” said says Henley & Partners CEO Dr. Juerg Steffen.
Increasingly, South Africans are looking to emigrate financially, to cease their tax residency, and avoid an expat tax.
However, Jonty Leon, legal manager at Tax Consulting SA warned those people living or working abroad can no longer avoid the long arm of SARS.
Under pressure to meet its revenue quotas, Leon said that the tax authority has started auditing the country’s non-compliant expatriates in earnest.