Is it time to tax the wealthy?

Fiona Zerbst, FAnews Online Editor

The phrase ‘wealth tax’ normally makes the toes of the wealthy curl, and although speculation amongst tax experts and economists is rife, it seems likely that Pravin Gordhan will announce the introduction of some form of wealth tax in his forthcoming budg

Currently, the highest marginal rate for individuals is 40% for those earning R617 001 and above. This may be increased to 42%, while individuals who earn R1.5m or more could expect a rate of up to 45%.

Although it may feel like it to some, our taxpayers are not horribly over-taxed compared with international standards. The super-rich directors and managers of mines, who may easily earn R30m a year, are paying the same tax as someone who earns R617 001, so there is room here for a super-tax, says Stiaan Klue, chief executive of the SA Institute of Tax Practitioners. (As an aside, it’s worth noting that the difference between a wealth tax and a super-tax is simply a matter of semantics.)

There are currently two ‘wealth taxes’ that operate in South Africa – Capital Gains Tax, which is at 10% and which functions as a transaction-based tax levied when assets are bought or sold; and Estate Duty, whereby 20% of the net asset value of deceased South Africans goes to the State (the first R3.5m is exempt). Do these ‘wealth taxes’ go far enough to address wealth redistribution in South Africa?

Redistributing wealth

In South Africa, it is undeniable that the majority of the wealthy are still white. This has meant racial polarisation of the debate, adding a further layer of complexity to the possibility of introducing a wealth tax.

“Not only is a wealth tax on white South Africans who earn a minimum amount of money constitutionally valid,” writes Pierre De Vos on his blog, Constitutionally Speaking. “It is also an important and welcome idea that must be supported by all right-thinking South Africans.” Rather a lot of South Africans disagree with De Vos, though, most notably wealthy whites.

The recent disparity between high-income earners and labourers was evident at the Marikana massacre and inherently part of the labour unrest on Western Cape farms. One labourer commented on Carte Blanche that farmers pay labourers R69 per day and claim they can’t pay more, then take their families to the Spur on Friday night and eat R140 worth of spare ribs. Inequality bites.

The issue of tax morality

Introducing wealth taxes is the logical thing to do, says Klue. “The system is not perceived to be progressive enough. We need to be seen as doing the right thing and redistributing the wealth currently in the hands of a small group of people.”

The question is, will wealthy South Africans be prepared to stump up and pay more, or will they consider doing a Gerard Depardieu and leaving the country of their birth? Like former French president Nicolas Sarkozy, who recently made headlines due to claims that he was planning to move to the UK to avoid France’s proposed 75% tax on the wealthy, Depardieu took exception to the tax rate – he left France and is now a Russian citizen.

Of course, one can’t straight-up compare tax rates in different countries – it’s comparing apples with pears – but the question is what individuals feel to be a palatable tax rate. When tax payers perceive the system to be unfair, they look for loopholes.

This is where tax morality comes into play. For a system to work, citizens need to be convinced that they are not being robbed blind, for one thing; and that their return on investment is good enough. Some argue that tax avoidance – finding tax loopholes – is legal. But is it strictly legal? And legality aside, is it moral?

Editor’s thoughts:
While we wait to see what the budget will bring, one thing is clear: South Africans feel their taxes are already being misappropriated and misused (Nkandla comes to mind). The user-pay principle, used to justify e-tolling, has taxpayers up in arms because it seems more like a cash-cow that falls outside the taxation system as we’re already paying a fuel levy. OUTA says Gauteng’s taxpayers already pay four times more to National Treasury than they receive in return, which suggests that Gauteng residents have already paid more than their fair share for freeway improvement already. Above all, taxpayers expect to see a return on their investment. The introduction of a wealth tax is certain to vex an already emotive issue. How do you feel about the proposal? Comment below or email fiona@fanews.co.za.