Coronavirus (COVID-19) SA –\u00a0 South Africa Needs a Wealth Tax | <\/strong>A wealth tax on the top 1% of South Africans could raise R143 billion. This corresponds to 29% of the R500 billion COVID-19 package announced by the government.<\/p>\n
The consequences of the COVID-19 lockdown are yet to be fully determined and understood. But one thing we can be fairly certain of \u2013 in South Africa its impact will be shaped by the country\u2019s inequalities.<\/p>\n
Based on our new study on wealth inequality in South Africa, we propose a progressive solidarity wealth tax. This would allocate the fiscal burden of current interventions on those most capable of paying. It is in line with the\u00a0recommendations recently made<\/a>\u00a0by the International Monetary Fund to equitably attain fiscal sustainability and better position the economy for post-COVID recovery.<\/p>\n
We show that a wealth tax on the richest 354,000 individuals could raise at least R143 billion. That equates to 29% of the announced\u00a0R500bn fiscal cost of the relief package<\/a>.<\/p>\n
A lot of studies show\u00a0how extreme income inequality is in South Africa<\/a>, but little has been documented about wealth. Net wealth is the sum of all assets less any debts. Assets include cash, bank deposits, pensions, life insurance, property, bonds and stocks. Debt includes mortgages and other loans such as retail store credit accounts or loans from friends, family and money lenders.<\/p>\n
Our findings are particularly relevant to the current crisis. South Africans are unequally armed to survive the contraction of the economy produced by the lockdown. Our paper helps get a sense of the size of the population likely to be under intense stress in the very short term.<\/p>\n
Before the lockdown, about half of the population was already in debt, or had near-zero net wealth. Therefore, this crisis will at best sink millions of people further into indebtedness or force them to beg, loot or starve. Conversely, our paper shows that a minority of individuals are in a much less vulnerable situation.<\/p>\n
The policy solutions needed to absorb the shock and recover fast must be carefully designed to take these factors into account. Principally, they need to reallocate resources to give everybody equal chances to survive the shock.<\/p>\n
In this unprecedented crisis, the government announced a relief package with a\u00a0R500 billion fiscal cost<\/a>. One key remaining question is how such a plan will be funded.<\/p>\n
We propose a progressive wealth tax, which would apply only to South Africans with a net wealth currently superior to R3.6 million, that is the richest 354,000 (1% of the adult population).<\/p>\n
The first bracket \u2013 all wealth between R3.6 million and R27 million \u2013 would be taxed at a 3% rate, the second bracket (R27 million to R119 million) at 5%, and all wealth above R119 million at 7%. Individuals with less than R3.6 million would be exempt. A billionaire would face a 6.7% tax rate: she would pay 3% on the fraction of her wealth higher than R3.6 million but lower than R27 million; 5% on wealth higher than R27 million but lower than R119 million; and 7% of the R821 million she owns above R119 million. This would leave her with post-tax wealth of R933 million.<\/p>\n
Other tax schedules could of course be designed. The objective here is to give an order of magnitude of the expected revenues.<\/p>\n
Taking into account the recent Johannesburg Stock Exchange All Share Index drop in value and assuming a 30% evasion rate (as available\u00a0evidence<\/a>\u00a0suggests), we simulate that such tax would raise R143 billion.<\/p>\n
Critics of a wealth tax argue that it would be too costly and complex to implement. But South Africa is well positioned to administer this tax cost-effectively.<\/p>\n
Firstly, the tax base we consider covers very few individuals, reducing the administration required.<\/p>\n
Secondly, South Africa already has in place third-party reporting by financial intermediaries straight into the South African Revenue Service, providing information on capital income and ownership. Existing municipal valuations could be used to value property assets. This would cover the major components of asset holdings, especially stocks and bonds.<\/p>\n
Capital flight, through offshoring or migration, is a potential risk. We account for this by making conservative assumptions about avoidance and evasion, and still project sizeable revenues. There is also markedly more cooperation between tax authorities to clamp down on undeclared incomes and assets in foreign jurisdictions, including tax havens. The premise is not a given. Capital flight implies forfeiting opportunities that considerably enriched them for the sake of avoiding a tax that barely makes an impact on their total wealth. Importantly, the wealthy themselves have said now is the time for solidarity.<\/p>\n
A wealth tax, contrary to popular opinion, would not necessarily discourage job-creating investments. Maintaining fiscal sustainability while sparing the most vulnerable is more important to ensure a quick recovery and attract investments. Moreover, inherited wealth has a significant role in South Africa: we find high levels of wealth concentration even among 20-year-olds. Diminishing the importance of inherited capital with a wealth tax may actually be a better collective strategy to improve social welfare, including growth.<\/p>\n
In light of the lessons learned from the\u00a0Zondo commission of inquiry into corruption<\/a>, taxpayers would need guarantees that this special tax will be properly collected and spent. The national treasury already uses ringfencing mechanisms to make revenue and spending for specific projects accountable. To answer potential criticism, the government could build on such rules to generalise more transparent practices.<\/p>\n
Aroop Chatterjee<\/a>, Research Manager: Wealth Inequality, Southern Centre for Inequality Studies,\u00a0University of the Witwatersrand<\/a>;\u00a0Amory Gethin<\/a>, Research Fellow – World Inequality Lab – Paris School of Economics, and\u00a0L\u00e9o Czajka<\/a>, Research fellow – World Inequality Lab – UCLouvain<\/em><\/p>\n
This article is republished from\u00a0The Conversation<\/a>\u00a0under a Creative Commons license. Read the\u00a0original article<\/a>.<\/em><\/p>\n