How to lose R50 billion a year and destroy South Africa’s tax base

The National Treasury says that a targeted wealth tax in South Africa would likely cause the rich to end their tax residency in the country, costing the economy over R50 billion a year, and endangering the entire tax base.

As South Africa’s political parties negotiate future partnerships and a way forward with the 2025 budget, many are looking for alternatives to a 0.5%pt VAT hike that will kick in from 1 May.

One of the key proposals that keeps popping up is to get rid of the VAT hike and instead implement more taxes on the wealthy in South Africa.

The proposal has been put forward by leftist and populist political parties in parliament, as well as through official advisory bodies like the Parliamentary Budget Office (PBO).

These group argue that by taxing the wealthy—usually the “top 5% of earners”—the government would be able to raise all of the necessary revenue it needs to cover what will be raised by the 0.5%pt VAT hike and non-adjustment of tax brackets in 2025.

According to the PBO’s response to the 2025 budget tabled on 12 March, a wealth tax could raise around R38 billion for the fiscus.

This would be enough to counter the approximately R30 billion shortfall the Treasury would be sitting with if it got rid of the VAT hike and adjusted tax brackets in line with inflation.

The PBO argued that VAT is regressive and would exacerbate the protracted cost of living crisis that many households are facing in South Africa, while the wealthy can shoulder the burden of additional taxes.

In addition to a targeted wealth tax, the office proposed other tax measures on “excess” wealth, including “excess profits” and “windfall” taxes that would apply to companies that “used the inflation upsurge to boost profit” or benefitted from the commodity price boom.

Tax experts warned against these measures, saying bluntly that a wealth tax won’t work.

This is because wealthy people in South Africa already pay a host of taxes on their wealth, and they are highly mobile—willing to pack up and leave if the government turns the tax screws too tightly.

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

Those who may not be quick to leave may simply find other ways of avoiding paying the tax – like moving their investments offshore.

South Africa could lose R50 billion a year

In its own response to the proposal for a wealth tax, the National Treasury said that instead of raising revenue like proponents think it will, it would instead put the whole tax base at risk.

“Introducing a wealth tax will generate limited revenue and potentially endanger South Africa’s tax base,” Treasury said.

It said that the top three income tiers in South Africa are expected to pay over 60% of all personal income tax in the country for 2025/26.

This represents a tax haul of close to R500 billion, while the wealth taxes already in effect raise about R20 billion to R24 billion a year.

If only 10% of this tax base were to change their tax residency as a result of a wealth tax, South Africa could lose R49 billion in tax revenue annually, it said.

This is before counting all the other taxes that these individuals contribute to, and the wider ripple effects of such a move on the economy.

“The personal income tax base is critical for fiscal sustainability, and introducing a wealth tax may potentially erode it, as high-net worth individuals are internationally mobile,” Treasury said.

National Treasury said that wealth taxes have also largely failed in other countries. Similar sentiments were echoed by SARS commissioner Edward Kieswetter.

Despite being implemented in around 20 countries, only four countries still have them in place. The taxes are generally abandoned or significantly reduced because they are simply ineffective.

The taxes carry a high cost of collection, they’re administratively complex, and they caused capital flight—all the while, the drew in extremely limited revenue for the state.

Ultimately, Treasury said that South Africa already taxes wealth in the country, and that four of these—excluding property rates—draw in more than R20 billion a year, boosting revenue.

Capital gains taxes alone raise in excess of R15 billion a year.

Some of the key wealth taxes already imposed on taxpayers in South Africa include:

• Estate duties on all assets (financial, real estate and land)
• Donation tax on asset donations
• Security transfer tax on all equity transfers
• Real estate transfers through transfer duties
• Property taxes on real estate at local level
• Capital gains tax
• Ad Valorem Tax on luxury cars and other high-value products.