Taxing South Africa into prosperity

Graeme Palmer, a Director in the Commercial Department of Garlicke & Bousfield.

The Davis Tax Committee (DTC) has called for written submissions by 31 May 2017 on the desirability and feasibility of wealth taxes for South Africa. It has advised that it will adopt a participatory and consultative approach allowing for wide engagement with all stakeholders on the issue.

According to the DTC, there are currently three forms of wealth taxes in South Africa, namely, transfer duty, estate duty and donations tax. Although some regard capital gains tax (CGT) as a wealth tax, the DTC does not, it views CGT as a form of income tax on capital.

The possible forms of wealth tax which the DTC is considering are:

• A land tax;
• A national tax on the value of property (over and above municipal rates);
• An annual wealth tax.

In its First Interim Report on Estate Duty the DTC made some observations on wealth taxes. It noted that South Africa was not unique in its minimal contribution made by wealth taxes, and many countries such as Australia, Mexico and Canada had no wealth taxes at all. Where countries do have wealth taxes they are relatively low yielding taxes.

The DTC has previously pointed out that there are some advantages to wealth taxes, such as contributing to vertical and horizontal equity, encouraging the productive use of assets and providing a useful check for taxes on income. However, the disadvantages far outweigh the advantages, which may explain the steady decline in the number of countries making use of such taxes.

The problems with wealth taxes are well documented. There are difficulties and costs associated with identifying, measuring and valuing net assets on a periodic basis. They are inefficient because compliance and collection costs are high. Furthermore, they may encourage persons to transfer their wealth offshore or even emigrate to more tax friendly jurisdictions. Recurring wealth taxes may also be a disincentive to entrepreneurship, discourage saving, and increase borrowings by illiquid taxpayers who have insufficient income to pay the tax.

Winston Churchill said, “that 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.” Undeniably wealth distribution in South Africa is highly unequal, but more growth rather than more taxes may be the solution.