Wealth taxes are critical for financing public services and reducing inequality

The 2025 Budget has brought into sharp focus the need to find sustainable forms of revenue to support growing social and economic priorities. It has also highlighted the failure of National Treasury to pursue innovative, progressive tax measures and its reliance on taxes such as VAT and the fuel levy, which will strangle the incomes of the poor. 

Why is there such fierce opposition to taxing wealth, given the persisting inequality in South Africa? Treasury would have us believe that progressive taxes, such as a wealth tax, will harm economic growth and lead to capital flight.

This rests on faulty theoretical foundations within economics and a prioritisation of profit maximisation over addressing persisting inequalities.

According to mainstream economics, wealth taxes distort markets and disincentivise investment. That is, they disturb what is assumed to be a perfectly functioning market and lead to a misallocation of resources. Therefore, an “optimal” tax must maximise economic efficiency and individual wellbeing. 

This is flawed for at least three reasons. First, it assumes the investment is financed by a limited pool of pre-accumulated savings that are eroded if we tax the wealthy. However, we know that most investment is financed by bank loans or retained earnings, rather than people’s wealth. 

Second, it assumes that taxes are wasteful and take money out of the economy. This ignores how taxation can raise revenue to support critical spending, such as on economic infrastructure. In this sense, spending from taxes can represent a better allocation of resources than if left in private hands, and this can crowd in private investment. 

Last, the pursuit of efficiency in this approach means equity and justice are secondary considerations in tax policy formulation. This assumes that tax has no role in redistributing income and wealth to address inequality rooted in apartheid and the accumulation of wealth by a white minority, and the structural exclusion and dispossession of the black majority.

By contrast, volumes of evidence, including from institutions like the IMF, show that inequality is harmful to growth and development, and policies that reduce inequality can be beneficial to growth and development. 

In a country as unequal as South Africa, failing to implement a wealth tax and improve taxation of income from wealth is not only unjust, it is unsustainable. Therefore, a narrow approach to wealth taxation, based on faulty theoretical assumptions, must be rejected.

While South Africa does have taxes on wealth, these are inadequate for South Africa’s revenue needs. For instance, the portion of capital gains subject to tax is 40%. This is below some countries, such as Canada, whose inclusion rate is above 50% and moderate compared with peers.

It means that earnings from the holding of wealth are taxed less than earnings from labour income – the shareholder pays less tax on their capital gains or dividends than workers do on their salaries.

This occurs in the context of the richest 1% of South Africans owning a staggering 55% of all personal wealth. This includes more than a 10th of all forms of assets and more than 90% of bonds and corporate shares.

At the same time, more than 12 million people are unemployed while public hospitals, schools and transport systems are in desperate need of funding. 

It is in this context that the Davis Tax Committee (2018) noted that a wealth tax was necessary. The committee suggested that work still needed to be done to define the appropriate tax base, collect data on patterns of wealth, and evaluate the revenue that would be generated against the administrative burden on the revenue authorities and taxpayers.

Since then, the South African Revenue Service’s High Wealth Individual Unit has been established and has made progress in tracking local and foreign assets owned by the wealthy to expand its tax base. 

Progress has also been made internationally through the UN Model Tax Law, approved by the UN in October 2024, which provides a methodology for estimating revenue, key considerations and country examples. The handbook provides a legal framework that can easily be adopted by countries, taking into account their contexts in implementing a wealth tax.

This work can help address challenges such as revenue estimates, assessing administrative capacity and putting in place measures to stem capital flight. 

Beyond ideological opposition, there are claims that wealth taxes will drive money offshore. Contrary to this, evidence shows that with capital controls and international cooperation, capital can be retained and taxed fairly.

In Argentina and Colombia, the use of tax amnesty programmes allowed the rich to declare hidden assets. Those who came forward were given incentives, while the programmes allowed for the government to derive information about asset ownership.

In addition, Argentina signed automatic tax information agreements with some other states, which allowed it to get better insights into foreign ownership of assets and to target tax evaders. 

The Institute for Economic Justice’s recent working paper shows that there is scope to expand the taxation of wealth and income derived from wealth, and unpacks international evidence of the gains that can be made. 

Recently, Argentina’s one-off wealth tax on individuals with assets above $2.4-million (about R43-million) raised the equivalent of R45-billion to fund Covid-19 relief and social spending. South Africa can take lessons from its Latin American counterparts, but this needs bold action and political will, rather than fearmongering by the minister of finance.  

Similarly, countries that have implemented other taxes on wealth (or income from, or trading of, assets) have seen some success. Belgium’s tax on financial transactions, including the sale of stocks and bonds, raises 2.4% of the country’s total tax revenue annually. In France, increasing dividend taxes led to higher investment, more hiring and stronger economic growth, contrary to the predictions of neoclassical economists.

In all these cases, governments acted decisively, set up the legal and administrative frameworks and reaped social and economic benefits. South Africa cannot afford to ignore wealth taxes anymore. The question is no longer whether to tax or not to tax wealth, but how to effectively do it.

In addition to a wealth tax, there needs to be a review of and an increase in taxes on dividends, especially given rising corporate profits and the steady reduction in corporate income tax rates. This could unlock significant public revenue without undermining investment.

Additionally, a modest financial transaction tax applied uniformly to all financial assets would broaden the tax base while minimising market disruption. 

Even though the choice to adjust tax policy rests solely with the minister of finance, this decision cannot be left to National Treasury alone. The most recent Budget fiasco has shown that broader debate, in a forum like Parliament, is needed. This will allow members of Parliament to be presented with evidence and recommendations from different stakeholders, whether in favour or in opposition to wealth taxes. 

Under such a debate, South Africa can, democratically, make the bold choice: either the government continues to protect the wealthy and corporate profit at the expense of the most vulnerable, or improve our tax system to reflect the democratic values of equity and dignity for all. DM

Zimbali Mncube is a tax and budget policy researcher with the Institute for Economic Justice.