Wealth tax warning in South Africa

The Parliamentary Budget Office (PBO) says the National Treasury should pursue additional taxes on the wealthy in South Africa instead of putting pressure on households through a VAT hike.

However, tax experts say that wealth taxes are unlikely to raise any revenue for the government and will encourage the rich to leave, delivering the opposite effect.

The PBO’s comments came in a presentation before the Joint Finance and Appropriations Committee on Tuesday, 18 March 2025, where the group provided its analysis of the 2025 Budget.

The core function of the PBO is to support the implementation of the Money Bills Act by providing research and analysis for finance committees in the National Assembly and National Council of Provinces.

Following the 2024 Medium Term Budget Policy Statement (MTBPS) in October 2024, the office suggested that Finance Minister Enoch Godongwana pursue a wealth tax to address revenue shortfalls.

However, the minister opted for a different approach in the 2025 Budget, initially proposing a two percentage point VAT increase before compromising with a 0.5 percentage point adjustment in 2025 and 2026.

The PBO raised serious concerns about the VAT increase, saying that it would disproportionately affect South Africa’s poorest.

It added that there is no evidence that a VAT hike will even raise the revenue expected by the minister, noting that the 2018 VAT hike to 15% undershot expected collections by R22.8 billion.

It stressed that implementing something like a VAT hike isn’t simple numbers game, and needs to be accompanied by a thorough analysis of how it would impact South Africans.

“VAT is particularly regressive in the context of a protracted cost of living crisis that many households are facing,” it said.

“Based on our modelling of the initial 2%pt proposed, the PBO found that the bottom two quintiles of the population currently contribute about 30% of the total annual VAT revenue.”

Even a smaller VAT increase would disproportionately impact low-income households, potentially exacerbating poverty and inequality.

Making matters worse, the PBO argued that the mitigation efforts to soften the blow on the poor would likely fall flat.

The above-inflation adjustments to social grants aren’t even enough to cover previous years of low increases, let alone new price hikes and the zero-rated basket doesn’t cover all the essentials poor households need.

Instead of hiking VAT, the PBO said that the National Treasury should instead:

• Reverse the 1 percentage point reduction in Corporate Income Tax rate.
• Introduce a 0.5 to 1.0 percentage point tax on the wealthy.
• Remove the Employment Tax Incentive.
• Hike taxes on high-value property homes.
• Introduce “excess profit” or “windfall” taxes on companies.

It said the wealth tax could raise upwards of R38 billion while removing the Employment Tax Incentive could add a further R7 billion to the pile.

The “excess profits” and “windfall” taxes would apply to companies that “used the inflation upsurge to boost profit” or benefitted from the commodity price boom.

A wealth tax won’t work

Calls for a wealth tax in South Africa have echoed in the halls of the government and at political rallies for years. However, they are premised on the assumption that the wealthy will stay around to be taxed.

According to Elizabeth Fick, head of tax and fiduciary at Investec, a wealth tax is unlikely to work in South Africa or generate the revenues that number-crunchers think it will.

“If you look at wealth taxes globally, of over 20 countries who introduced them, only three countries still have them,” she said.

According to the bank, many countries have tried implementing wealth taxes but ultimately end up scrapping them because they are expensive to manage and don’t really bring in revenue.

Countries like Norway, Spain, and Switzerland still have wealth taxes, and France and Italy have limited wealth taxes, focusing only on certain assets like real estate.

Investec noted that India used to have a wealth tax, but it was so ineffective that even the tax collectors were trying to avoid it, so they got rid of it in 2015.

The focus on a singular wealth tax is also a misnomer. South Africa already has several wealth taxes that are in full effect, including:

• A Luxury Car Tax, introduced in 2011.
• Ad Valorem Tax on other high-value products.
• Capital Gains Tax, which has been around since the early 2000s and was adjusted in 2016.
• Transfer Duties, which are charged on properties valued above a certain amount (R1.21 million in the 2025 budget).
• Municipal Rates based on the value of property.
• Dividend Taxs, which are currently set at 20%—higher than the global average of 15%.
• Estate Duty and Donations Tax, which are currently set at 20% or 25%. The estate duty exemption has remained unchanged since 2007.
• Securities Transfer Tax, which is a tax on the transfer of securities.

Calls for even more taxes on the wealthy also ignore the potential response and the context of South Africa’s extremely shaky position on the Laffer Curve.

Investec noted that wealthy individuals typically have the means to move their assets or even relocate to countries without these taxes.

South Africa has already seen a notable exodus of wealthy individuals from the country, with millionaire numbers declining over the past decade.

This is either through emigration or simple wealth destruction brought about through poor economic policy.

The other potential fallout from a wealth tax is that taxpayers will revolt and find every way possible not to be subject to them.

“If the tax is applied to specific assets, people might start shifting their investments to avoid the tax, which could distort financial decisions,” Investec said.

It added that these taxes often incentivize individuals or even companies to hide assets, leading to a decline in tax morality.