A wealth tax in South Africa would depress economic growth, and benefit only the tax consulting industry.
Wealth taxes – recurrent taxes on individual net wealth holdings – are the go-to proposal for left-wingers who claim to be concerned about wealth inequality.
In elementary left-wing logic, the argument is simple: nobody needs that much money, so it would be better if the excess money of the rich is given to the poor, who do need it.
Consider this article in The Conversation from 2020, by three left-wing economists, which argues that because of the pandemic’s effect on inequality, South Africa needs a wealth tax now (well, then).
Or this extract from a 2019 book in the same journal, which blames South Africa’s wealth inequality on “patrimonial capitalism”, and proposes a redistributive wealth tax to “add considerable legitimacy to the overall tax system”.
Ever since the Katz Commission first raised the spectre in 1994, wealth taxes have been on the agenda for the ruling ANC as a party, and the National Treasury as a government institution. Both have repeatedly floated the threat of wealth taxes, inter alia, in response to questions about how the pie-in-the-sky National Health Insurance scheme might be funded.
The Davis Tax Committee, which reported in 2018, was equivocal about a wealth tax. It didn’t outright reject the notion, but said that “more work is needed to ensure that the tax is well-designed and will yield more revenue than it costs to administer”.
Ginidiocy
I’m not going to rehash my arguments about why inequality is a red herring. I’ve covered that subject often enough, not least in three comprehensive articles prompted by Oxfam’s annual inequality reports, a critique of the so-called “doughnut model” of an economy that would supposedly end inequality, and a seminal column I wrote back in 2011 in which I coined the term Ginidiocy.
In South Africa in particular, measures of inequality are dominated by the fact that almost half the population is out of work. South Africa’s problem is poverty, not inequality. And the causes of that poverty and unemployment are well known to readers of Daily Friend: lack of economic freedom, policy hostility to private sector businesses and investors, overbearing government intervention in markets, red tape, widespread corruption and cronyism, crime, and poor education outcomes.
The South African government simply does not understand wealth creation, nor how to establish and sustain the conditions necessary for wealth creation.
“Ineffective”
Even the advocates of wealth taxes concede that there are “implementation challenges”, and that it wouldn’t raise enough money to be considered “a panacea for the need to generate sufficient revenue to reduce the deficit before borrowing”.
They also concede that “net wealth taxes have been ineffective in many countries”.
India, for example, raised its first wealth tax in 1957, but abolished it in the 2015/16 financial year because “the wealth tax only generates a little amount of income, it places a heavy compliance burden on taxpayers and an administrative burden on the department”. It was easier to just raise the marginal income tax rate on high-income earners.
A report on wealth taxes in OECD countries noted that while 12 rich countries had such taxes in 1990, only four still had them by 2017.
Those that still levied wealth taxes, like France, found that the wealth they were eyeing was rapidly relocating to neighbouring Belgium or Switzerland.
Punishing thrift
Although some wealth taxes already exist in South Africa – most notably fixed property taxes levied at municipal level – and wealth transfer taxes also exist in the form of estate duty, donations tax and capital gains tax, it has never had a tax on net wealth; that is, a person’s assets minus their liabilities.
There are many common-sense objections to such a wealth tax, however.
As a matter of principle, a wealth tax punishes thrift. It punishes savings and investment. It punishes wealth creation. The rich could evade some of the tax simply by spending their wealth on luxuries, instead of holding assets that generate returns.
Do we really want more people who drink Dom Perignon, wear Breitling watches and drive Bentleys, instead of people who invest in businesses and charitable foundations?
Taxes shouldn’t determine whether or not someone buys something today, or saves the money to buy something in the future. Punishing saving reduces the amount of money available for investment and capital accumulation, which has a depressing effect on economic growth.
Conversely, rewarding spending will increase the general price level. If, instead of saving, lending or investing, the wealthy would rather spend more money on, say, private schools or cars or cosmetic surgery, the prices of education, vehicles and healthcare are going to rise to accommodate this glut of cash.
Valuation
Second, they are difficult to assess. Homeowners will know the nightmare of getting accurate valuations registered with their municipalities. South Africa has very inconsistent municipal valuation rolls, and valuations are frequently disputed. Now imagine the same problem on a much wider scale.
One of the pro-wealth-tax articles I linked above acknowledges: “We would also suggest that personal assets such as luxury vehicles, works of art and jewellery be excluded because of valuation difficulties. Worldwide, such assets are under-reported, undervalued and/or hidden.”
This is hardly a solution. This would just encourage people to move their wealth into untaxed asset classes like that which are hard or impossible to value.
Liquidity
Third, wealth is rarely liquid. Forcing people to pay a recurrent wealth tax on assets, in cash, means forcing them to liquidate at least a part of their assets. This means diluting their ownership in companies, which will drive down stock prices, which reduces capital available to companies. It can also mean selling off assets wholesale.
Estate duty already does this on a small scale: if the only wealth parents leave their children is the family house, for example, the inheritors either need enough handy cash, or are forced to sell that house in order to pay a share to the government.
In the case of wealth held in the form of government or corporate bonds – which are loans to the government or to a company – the consequences will be even worse, since an annual wealth tax can easily wipe out the yield on such an investment. That means yields would have to rise, which means the cost of credit throughout the market must rise by the amount of the wealth tax, which means everyone pays the wealth tax and economic activity becomes correspondingly harder and more expensive.
Again, and for much the same reason as punishing saving, punishing asset ownership depresses economic activity.
Capital flight
Fourth, absent a global treaty to tax wealth everywhere, wealth taxes will simply drive wealth offshore. South Africa has already suffered massive wealth emigration, thanks to its poor economy. Policies that encourage more capital flight seem, well, daft.
Fifth, a wealth tax generates a surprisingly small amount of money.
According to the OECD, tax revenues from wealth taxes ranged from a mere 0.2% of GDP in Spain to 1.0% of GDP in Switzerland in 2016. As a share of total tax revenues, they ranged from 0.5% in France to 3.7% in Switzerland, but the latter’s relatively high revenue has to be viewed in light of the fact that it levied no separate property taxes.
The reason for this low haul goes back to the earlier problem of assessing wealth, and excluding asset classes that are very hard to value. The rich aren’t stupid. They’re not going to sit on a pile of cash or stocks, waiting for the taxman to come around every February to nab a share, when they can easily stash their wealth in art, antiques, movable assets like cars or boats, jewellery, or offshore assets.
Tax planners
The most certain beneficiaries of a wealth tax would be tax planning professionals. Just as estate tax planning is a very profitable business, taxes levied on a much broader range of assets will be the subject of an entire industry of accountants and financial advisers whose own earnings depend on minimising the revenue the government derives from wealth taxes.
It is an old adage that a government should tax what it wants less of, since taxes discourage the taxed activity. That’s why they tax booze, cigarettes and gambling.
If a country wants less capital formation, less savings and less investment in companies, and consequently less profit and less employment, it should tax the wealth that constitutes that capital, those savings, and that investment.
If a country wants the economy to grow, on the other hand, then it shouldn’t tax the mechanisms by which it grows.
[Photo: Illustrative image used under Creative Commons licence – wealthtax.jpg]
The views of the writer are not necessarily the views of the Daily Friend or the IRR.
If you like what you have just read, support the Daily Friend.