Alarm bells over wealth tax in South Africa

Alarm bells are ringing in South Africa over the potential introduction of a wealth tax, a measure being pushed by several civil society organisations and now being considered by the National Treasury in collaboration with SARS.

Among these organisations calling for an increased tax on the rich is the Institute of Economic Justice (IEJ), which has been vocal about the need for a more equitable tax system to support vulnerable populations.

One of the IEJ’s key proposals is to increase the Social Relief of Distress (SRD) grant to R700 per month, which is the poverty line.

To fund this and other initiatives, the IEJ has suggested a suite of tax reforms, including the introduction of a wealth tax, luxury VAT targeting high-end goods consumed by the wealthy, adjustments to tax rebates for high-income earners, and higher duties on dividends and estates.

According to reports, the National Treasury, represented by acting head of tax and financial sector policy Chris Axelson, confirmed that it is exploring the feasibility of a wealth tax in a recent address to members of parliament.

Axelson revealed that the Treasury, in collaboration with the South African Revenue Service (SARS), is analysing data on declared wealth to better understand its distribution.

Based on these findings, a decision will be made.

If a wealth tax is to be introduced, questions remain as to whether it will tax wealth directly or focus on the returns generated by wealth, which are already subject to various taxes, including personal income tax, capital gains tax, and taxes on interest and rentals.

While the proposal for a wealth tax has gained traction among certain advocacy groups, it faces significant opposition from economists and tax experts.

Critics argue that such a tax could have unintended consequences for South Africa’s already fragile economy.

Dawie Roodt, chief economist at the Efficient Group, has been vocal in his opposition, highlighting the potential for capital flight and reduced investment as wealthy individuals and businesses seek to move their assets to more tax-friendly jurisdictions.

According to Roodt, introducing a wealth tax could exacerbate the country’s economic challenges by undermining investor confidence and slowing economic growth.

Other economists echo similar concerns, emphasising that South Africa’s tax base is already under immense strain.

The country’s high-income earners, who make up a small proportion of the population, contribute the lion’s share of tax revenue.

Adding another layer of taxation on wealth could risk driving these contributors out of the tax net entirely, either through legal tax avoidance strategies or emigration.

Furthermore, critics point out that the administrative complexity and costs of implementing and enforcing a wealth tax might outweigh the potential revenue gains, particularly in a system already grappling with inefficiencies and corruption.

Some experts also question the fairness of a wealth tax, arguing that wealth is often accumulated over generations through after-tax income, meaning it has already been taxed at various stages.

They caution that such a policy could create a perception of punitive measures against success, potentially discouraging entrepreneurship and economic activity.

The debate over a wealth tax in South Africa remains heated, reflecting the country’s broader struggle to balance the urgent need for social welfare funding with the imperative to sustain economic growth and competitiveness.

Read: What you need to earn to live a ‘decent’ life in South Africa