10/08/22

SOUTH AFRICA: Emigration warning as ANC puts wealth tax back on the table.

As published on businesstech.co.za, Wednesday 10 August, 2022.

Experts at Tax Consulting South Africa warn that the ANC’s renewed position on taxing the country’s wealthiest individuals to fund a basic income grant could push them offshore, adding further strain to the tax base.

At the party’s policy conference held at the end of July, the ANC said that a wealth tax is the preferred option to fund a basic income grant in South Africa, with delegates pointing specifically to the top 5% of earners in the country who hold “a majority of wealth”.

“The majority of the wealth of this country is in the hands of 5% of the population. That’s not right. We’ll have to have SARS look into (a wealth tax),” the party said.

The statement, which appears as an initial step to establishing a permanent basic income grant, is supported by a study conducted by the University of Witwatersrand, Tax Consulting said.

The study titled “Coronavirus: why South Africa needs a wealth tax now” speculated that “a wealth tax on the richest 354,000 individuals could raise at least R143 billion”. To fund the ANC’s proposed basic income grant of R350 for unemployed adults, the state would only need half of that.

However, the tax experts warned that even though R143 billion seems like a staggering amount, it is still far from addressing the deep inequality that persists in South Africa – and could ultimately do more harm than good.

In a note published this week, the group said that one key concern of the proposed wealth tax is the exodus of the “High Net Worth Individuals”, who would be the subject of such tax if imposed.

The Bureau of Economic Research (BER) has also posited that implementing a wealth tax may see an already small tax base in South Africa shrink further, with wealthy individuals opting to emigrate to a lower tax jurisdiction.

“The BER goes further, as supported by a number of independent economists and recent Intellidex reports, raising the concern that should a wealth tax be implemented, it would be done so at a high effective tax rate due to the pool of individuals who qualify, being so small,” Tax Consulting said.

“The idea of a wealth tax is the adjust the financial inequalities in South Africa. (But) it is human nature to do what is best for oneself. This includes protecting hard-earned money against a tax, which can be construed almost as punitive in nature, or at least more punitive than the current bracket system of taxation in South Africa,” the group said.

The warnings of capital flight through emigration also come from the same committee that recommended it be investigated, Tax Consulting noted.

While the idea of a wealth tax was initially tabled years ago, it became a topic of wide discussion upon the release of the wealth tax report by the Davis Tax Committee in March 2018.

In its final report on the feasibility of a proposed wealth tax, the committee confirmed, by empirical evidence, that the wealth inequality in South Africa is higher than even global wealth inequality.

However, mention was made in the report of the adverse impacts of imposing a wealth tax, with the report stating: “The adverse consequences of wealth taxation such as capital migration, disincentives to save, the effect on entrepreneurship and employment must be thoroughly considered”.

The authors said this would have a large impact on the already small tax base, with a knock-on impact of an increased unemployment rate for unskilled labourers and some professionals, sector dependant.

“It has been suggested by the Davis Tax Committee that although the purpose behind the proposed net wealth tax is admirable, long-term sustainability must be considered. This indicates that the proposed tax system must be designed in such a way not to be deemed prohibitive on wealthy individuals and not exacerbate emigration rates in any way,” Tax Consulting said.

“This will allow the proposed system, in the long run, to generate more revenue than the costs to administer it.”

The tax experts said that a wealth tax might be for the greater good, but the implementation must follow a staged and calculated approach to promote the retention of contributing taxpayers and stem the flow of emigration in favour of more digestible taxation.