Business Maverick editor Tim Cohen has recently written critically of the idea of a wealth tax. But, as Dr Dick Forslund pointed out in his riposte to Cohen, the latter was arguing not about a wealth tax but rather about increased marginal rates of income tax on high-net-worth individuals (HNWIs).
The essence of Cohen’s argument is to be found in the following passage: “So, back to Pravin Gordhan’s 2017 wealth tax. It[’s] simple enough; it constituted an increase of the maximum marginal rate – the rate of tax that applies to the top income bracket – from 41% to 45%. He also increased the withholding tax on dividends from 15% to 20%, and limited the adjustments for bracket creep (when salaries rise with inflation but the tax brackets do not).
“The expectation at the time was that this would affect only about 103,000 people earning over R1.5-million a year. The estimated income from those three measures was supposed to be around R23-billion. It was a full-on assault against the rich, because, as we all know, the rich are all evil cheats who gained their wealth not through skill, or hard work or innovation, but through skiving the system somehow.
“So what happened? We had to wait a year to see, but the truth came out in the 2018 [B]udget. Not only did SA not get R23-billion, SARS scooped R20.4-billion less than expected in personal tax. Instead of the R483-billion from personal income tax anticipated, it collected only R462-billion. Increasing the tax rate garnered exactly nothing.”
That a former editor of Business Day would seek to defend any attempt to increase taxes on HNWIs is not surprising, but it is disappointing, reflective of the libertarian economics that elides so conveniently over the egregious patterns of concentration of wealth in this country.
In justification, let me briefly offer the following: increasing income tax is not the equivalent of a wealth tax. Second, Cohen, in keeping with the ideological bent of this kind of argument, relies on the Laffer Curve to argue against tax increases. There is a stark absence of any solid empirical research that supports the Laffer argument that there is a clear connection between lower tax rates on the wealthy and increased growth. A cursory examination, for example, of a series of research papers published by the Institute on Taxation and Economic Policy reveals this.
But even if the famous serviette on which Laffer outlined his theory has any traction, consider, for example, the variables in play in South Africa that contributed to lower tax revenue: the effect of the degradation of SARS under Tom Moyane as documented in the Nugent Report, declining economic growth (Treasury has overestimated economic growth for a number of years), declining tax morality, unquestionably fuelled by the corruption pandemic that has engulfed the South African state over the past decade, and more. Oddly, Cohen concedes that these factors all existed in South Africa and notes the empirical evidence against Laffer, but he still persists with the argument that Laffer may have traction in South Africa!
The reality is that tax evasion is widespread and has been for more than a few years. Whereas the majority of the population pay their fair share, through VAT and PAYE, if they are fortunate enough to be in employment, there is a clear cohort of HNWIs who continue to evade tax.
The upshot of all this is that Cohen’s column will doubtless receive an enthusiastic embrace from the HNWI community, save for those that recognise the historical legacy and current reality that is egregiously unequal South Africa.
Take but two numbers: a UN report estimated that in 2016 South Africa lost $3.4-billion in tax revenue through over-invoicing and customs fraud. The Commissioner of SARS, Edward Kieswetter, is reported to have said that in 2017 alone R93-billion left South Africa in service charges such as commissions paid by SA-based subsidiaries to offshore companies, management fees and royalties. There are also credible reports that South Africans hold some R427-billion of assets offshore, of course not all illicit, but certainly not all reported to SARS.
The figures in the Budget Review 2020 reveal that there are no more than 5,000 taxpayers reporting taxable income in excess of R5-million. As I have often noted, the range of Maseratis, Ferraris, Lamborghinis, Porsches and other luxury motor vehicles coupled to the many luxury homes that are to be found in the major cities as well as locations like Plettenberg Bay is itself evidence that these figures are clearly not reflective of tax reality. Add to that the many South African who control offshore trusts and companies situated in the Channel Islands, Mauritius and the Virgin Islands, and the scale of the evasion only grows exponentially.
The upshot of all this is that Cohen’s column will doubtless receive an enthusiastic embrace from the HNWI community, save for those that recognise the historical legacy and current reality that is egregiously unequal South Africa.
But, in all his conceptual confusion, Cohen has focused on a different target for that of a wealth tax. In short, he has raised a different set of arguments to those concerning the question of a wealth tax levied on wealth and on income. While one published idea of a tax of between 3-7% on wealth which will produce upward of R50-billion a year, is, in my view, seriously problematic both from the perspective of the unprecedented high rate and the lack of data on wealth, that does not mean that a wealth tax has no merit.
The challenge is to obtain data on wealth patterns and the owners thereof (which cannot reliably be extrapolated from income) and then set up a viable collection system. The benefit of a wealth tax set at a comparative rate is less about massive revenue increases which would flow directly from the tax itself, but rather that it could produce data on ownership of wealth (the definition of which is itself a challenge). This, in turn, would assist in the closing of the income tax gap, in which Cohen has not shown the slightest interest if his article is any evidence thereof.
Oh, and by the way, given the nature of wealth patterns, it might add some needed legitimacy to the system, that is if we care about the views of 60 million as opposed to 100,000. DM
Read Tim Cohen's response here.