Closing the inequality chasm — the pros and cons of imposing a wealth tax in South Africa

14 Sep 2022

Various countries with significant wealth disparities such as ours have considered the introduction of a form of wealth tax. The idea is that this would assist in closing the wealth gap. ‘Tax the wealthy’ is a widely heard populist refrain.

The ANC’s national policy conference held recently indicated that certain members favour some form of wealth tax in order to fund a basic income grant. It has been reported that the party has now revived plans to introduce a new tax on the wealthy. This proposal was initially raised at the ANC’s national conference in 2017.

In South Africa, income inequality is high and persistent. Inequality is complex and multidimensional. It is commonly separated into two categories, namely inequality of opportunity, including income inequality, and inequality of outcome, which incorporates wealth inequality.

Inequality can be measured in different ways and, thus, a variety of indicators should be used in order to obtain a meaningful and accurate picture of inequality. In 2014, the richest 10% of the population earned approximately two-thirds of the total national income in South Africa. These indicators justify why South Africa is identified as an “extreme inequality regime” in the 2018 World Inequality Report.

Wealth inequality, which refers to the unequal distribution of assets owned by the individual or household, is more concentrated than income inequality in South Africa. Statistics South Africa highlights that the richest 10% of the population holds around 95% of all wealth in South Africa.

Various countries with significant wealth disparities such as ours have considered the introduction of a form of wealth tax. The idea is that this would assist in closing the wealth gap. “Tax the wealthy” is a widely heard populist refrain. Its proponents argue that the wealthy can afford an extra tax and that the amounts collected could make a significant difference in reducing the tax shortfall caused, among other things, by a weak economy.

However, there are many challenges in respect of a wealth tax. Firstly, direct taxes are generally imposed on income earned (received or accrued) by a taxpayer or on capital gains arising from the disposal of an asset. A wealth tax would not be triggered by income earned or capital gains arising from the disposal of an asset. Instead, it may be levied on some concept relating to the value of a person’s estate.

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The question arises how such a person would fund the tax. The taxpayer would likely have to dispose of assets or borrow money in order to fund this new tax liability. While estate duty is a form of wealth tax, it is imposed on the death of the taxpayer when there is a deemed disposal of the relevant assets held by the deceased.

A difficulty with imposing a tax on unrealised gains is that asset values are often volatile and, as we have seen during the course of this year, stock markets around the world have shown significant decreases in value over the last eight months. The S&P 500 Index has lost 15% year to date while the JSE All Share Index is down approximately 10.5% in the last six months. This makes it difficult to calculate the value of a particular individual’s assets. This difficulty is even more pronounced when such individuals are not invested in asset classes with a publicly available price.

A question also arises as to how the relevant taxpayer’s wealth arose. If a wealth tax is based on notions of equity then perhaps it should make a difference whether the taxpayer, for example, built up a business empire which employed thousands of people all of whom paid tax, as opposed to a taxpayer who accumulated wealth by shipping jobs offshore.

An elephant in the room in relation to the concept of a wealth tax is the use of trusts. Trusts are very prevalent in common law jurisdictions such as South Africa. There are many reasons for setting up a trust. These include; asset preservation; limiting the likelihood of insolvency; allowing assets to be administered by professional trustees; and providing for distributions to various family members on a discretionary or vested basis.

The question arises whether it is worth devising a complex new wealth tax if it is only to be imposed on individuals. Yet the imposition of a wealth tax on trusts would be very difficult. This is because trustees hold assets for the benefit of the various beneficiaries of the trust. Some of these beneficiaries may not meet any criteria relating to the imposition of a wealth tax. The beneficiaries may also be discretionary and may therefore not receive any distributions from the trust. The class of beneficiaries may also change over the lifetime of the trust.

In addition, trusts are sometimes used to hold business assets. Why then should a trust suffer wealth tax and not, for example, a company? It, therefore, seems difficult to include trusts in any wealth tax regime but to exclude them would likely significantly reduce the efficacy of any wealth tax.

It may be that, before looking at complex new forms of taxes such as a wealth tax in South Africa, we should first look at closing the tax gap by ensuring greater levels of compliance with our existing tax laws. DM

Peter Dachs is a tax director at law firm ENSafrica. He writes in his personal capacity.

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