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The great wealth tax debate continued

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The great wealth tax debate continued

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By Tim Cohen
07 Feb 2021 4

Tim Cohen is editor of Business Maverick. He is a business and political journalist and commentator of more years than he likes to admit. His freelance work has included contributions to the Wall Street Journal and the Financial Times, but he spent most of his life working for Business Day. After a mid-life crisis that didn't include the traditional fast car, Cohen now lives in the middle of nowhere in the Karoo.

Allow me please a little indulgence in answering my (many) critics on the subject of the envisaged weath tax. Just to recap quickly, I wrote in January this year (2021) that increasing taxes to pay for the roughly R20-billion SA will need to pay for Covid-19 vaccines was a bad idea because SA is already an overtaxed society.

First published in the Daily Maverick 168 weekly newspaper.

I didn’t actually think, in general, that this was a controversial statement because to me it’s so obviously true. South Africa’s pay a level of tax comparable to the richest countries in the world and get services for that comparable with the poorest countries in the world

Anyone who denies this statement is just willfully blind. But, it turns out, when you are focused on your ideology and not on real life, it’s pretty easy to end up being willfully blind. I’m really not casting aspersions on the ethics or motivations of people who believe in socialist solutions — I believe in some of those myself — but it’s crucial to face reality head-on.

So, let me just justify statistically my statement about the SA’s tax rate and the level of its services, because it’s relevant later on. 

I suspect the best international comparison of the quality of government services is the performance of scholars in a maths test. Why? Because maths tests are probably the most functionally accurate measure we can devise for a service that can vary hugely in quality. You have, almost by definition, a set of questions that are binary — they are either right or wrong — combined with the ability for the service to make a meaningful difference. 

This is measured internationally in Trends in International Mathematics and Science Study (Timss). You can ask nice crisp questions and get easily validated results. In the 2015 Timms study for example they asked Grade 4 students what was 512 times three. These are the kinds of questions that give you meaningful results.

So, it turns out that 41% of South African kids got that right compared to 63% of Morrocan kids of more or less the same age. SA came third last in 2019 Maths Timss for Grade 4 (actually SA cheats in this study by giving the test to Grade Fives because that, er, “matches SA’s curriculum”).

Well,  these are the top 59 countries in the world, so maybe it’s not as bad as it seems. But the degree of difference is enormous — SA is about 40% worse than the best. And compared to the 2015 Timss, most countries are getting better, but SA generally stayed about the same, getting marginally worse for Grade Fours (Grade Five’s in SA’s case) and a little better for Grade Eights (or Grade Nines in SA’s case)

But this is not even the most incredible thing about the report.  It also asks parents whether they are satisfied with their children’s maths education. In this list, SA comes very close to the top, with 75% “very satisfied” with their children’s achievements. Ah, well, isn’t that just South Africa for you — underperforming, but closing our eyes to that fact. Rather like socialist economists. 

And on that topic, Economist with Alternative Information & Development Centre Dick Forslund takes issues with my numbers

Forsland argues that actually SA’s taxes have not increased meaningfully over the past few decades, and cites National Treasury figures for the proportion of GDP to national government tax income as evidence. These figures show GDP to national government income tax was about 26% of GDP in 1989 and that is about the same now. 

This contrasts to my figure of 29% of GDP as the 2018 number. I always wonder sometimes where academics actually live and how it’s possible to ignore what is actually happening around you. For the record, I was drawing on these numbers compiled by the OECD, which include all taxes, including local government taxes, which as everybody who owns a house knows, have just exploded over the past decade. But I should have specified, and I apologise for the misunderstanding. Forsland also correctly points out that I should have mentioned government looting as a kind of tax.

Meanwhile, researchers for the Southern Centre for Inequality Studies claim I have conflated income taxes, capital income taxes, and wealth tax. My article “incorrectly states that Minister Pravin Gordhan imposed a wealth tax in 2017”, they say.

This is also a bit of a numbers fandango. I’m aware of the difference between income and capital. My argument is that in 2017, then Finance Minister Pravin Gordhan tried to impose a wealth tax but because he didn’t have fiscal tools to impose a wealth tax proper, he used income tax tools at his disposal as a kind of substitute. Since he increased personal tax for the top 1%,  increased dividend tax and jimmied the tax brackets, I think it was pretty clear what he was trying to do. 

The trio of authors say that it wasn’t actually that this tax did not work, as I claimed; it was just that government overestimated what it would garner. The actual quantity of personal income tax that government collected did in fact rise, and VAT receipts were likewise overestimated. 

Well, this is kinda semantic, right? You expect government income to rise in line with inflation which that year was about 5%, more or less the same as the increase in what the government took in the following year. The question is, did the government garner a larger proportion of tax than it would have otherwise, and I still maintain, it did not. For one thing, Government increased the VAT rate the year after that, which undoubtedly they would not have done if targeting the rich had worked. 

There are other issues involved, including complicated issues around the Laffer curve, which are beyond the scope of this article. But the main problem with the trio of writers is that they didn’t address all of the issues discussed in government’s own very extensive examination of the feasibility of the imposition of a wealth tax. 

As a final word on this topic, it’s worth comparing what government might get out of a wealth tax, as opposed to what it would get from improving the economy. The lab suggested a once-off or recurring wealth tax aimed at the top 1% set at about 3% to 7% of GDP which it estimates would garner somewhere between R70-billion and R160-billion. It estimates a 30% evasion rate, suggesting the tax would raise 2.8% of GDP or about R134-billion. 

But here is the thing: SA is now a $400-billion economy. A one percentage point increase in the growth rate would work out at around R70bn. In other words, by improving the economy just a tiny bit more than it would grow otherwise, SA could garner the same as it would by imposing a wealth tax in two years. 

And this is why economists around the world don’t think wealth taxes, as morally desirable as they might seem, are the real solution. University lecturers, I find, like to sprout this stuff because it makes them popular with students. But in the real world, growth is what matters most of all. DM168

This story first appeared in our weekly Daily Maverick 168 newspaper which is available for free to Pick n Pay Smart Shoppers at these Pick n Pay stores.

Addendum

The great wealth tax debate: Heed the 60-million South Africans, rather than the 100,000 wealthiest

 

Subsequent to the publication of this piece, no less a person than the former Head of SA Tax Advisory Committee Dennis Davis has added his voice in criticism of my views. One challenges SA’s foremost expert on tax law on the subject of tax with some trepidation, but there are some aspects of Dennis Davis’ response to my views on the proposed wealth tax that bear a response. 

First, his claim that I have “not shown the slightest interest” in the closing of the income tax gap, is contradicted by the very first paragraph of my article on the issue in which I bemoan the level of inequality in SA and then one paragraph down, where I endorse SA’s sharp tax progressivity. Financial commentators get used to SA’s socialist politicians and their hired guns trying to pigeon-hole anyone who disagrees with them as shills for the “Lamborghini drivers of Cape Town”, but one does sometimes hope for some vague acknowledgement of what you actually write, especially if it’s in the first paragraph. Can I just state again, to be crystal clear, I am deeply concerned about inequality, as I am about effective methods of combating it. 

Second, he says the “essence” of my argument is about Pravin Gordhan’s imposition of a quasi wealth tax in 2018, which was based on income not asset wealth. Well, in fact, the article is more about overall taxation levels in SA and the likely efficacy of tightening the screws further. I used Gordhan’s tax increases on the top 1% in 2017, which as I have pointed out above, backfired, as an example of what might happen if a wealth tax proper were to be introduced. I know (obviously) that this was not wealth tax proper, but I should have made this transparently clear from the start. One hopes for a little latitude in 800-word articles. 

But I cited what happened in 2017 as an example of what could happen if a wealth tax proper was imposed because it is in the same bracket, and ostensibly targeting the same people. Gordhan was forced to use fiscal tools available at the time because, as Davis’ committee has pointed out in its extensive report on the issue, imposing a wealth tax proper would require a substantial bureaucracy and some through planning. In his enthusiasm to falsely claim I ignore wealth disparity, Davis unwittingly reveals his own bias: he ignores both the efficacy of government and the necessity to stimulate economic growth, because, I assume, he feels this is not the issue at hand. But actually, it is precisely the issue at hand.  

Third, Davis cites disapprovingly my comments about the Laffer curve, which he says (and he would know) there is no definitive empirical evidence that it’s valid. Actually, I was just making a joke, suggesting that since Gordhan’s quasi wealth tax backfired, Treasury might consider the opposite, and reduce taxes in order to get more. I’m sorry my humour is too obscure.

I admire Gordhan tremendously, but the fact is that he is definitively a socialist in his political outlook, and when it came to hiring a tax advisory committee, he appointed generally people of like mind, headed of course by Davis himself. After five years of study, the committee came to the conclusion, unsurprising given their predilections, that South Africans should and could pay more tax. Socialists do tend to think any social problem can be solved with more tax. And so it has come about that we are now paying OECD levels of tax with levels of service on a par with much poorer countries. 

I think the main thing socialists miss in their derision of the above mentioned Lamborghini drivers is that South African wealth is wafer-thin and heavily rooted in debt. Despite claiming their target is only the very rich, in their enthusiasm for higher taxes, government has ended up increasing tax on everyone, sometimes with the explicit endorsement of the Davis committee and sometimes with a kind of slippery vagueness.

In my view, this higher tax burden, along with State Capture, has transparently hurt the SA economy which is now emerging from its third recession in six years, something that has not happened to any other major country on the planet. Obviously, this is an arguable point, but I have no doubt that imposing a wealth tax now will make the situation worse, and consequently will not reduce inequality, just as SA’s higher tax burden over the past decade has not increased employment, and in that sense, has increased inequality. As the head of the committee which recommended and endorsed most of SA’s modern tax system, Davis bears some responsibility for this outcome.

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  • Well, this at least end frankly, with a re-affirmation of belief in “growth”, but I’m still not seeing much evidence that a wealth tax is – as initially stated – a bad idea for SA.
    It really would help to maintain a distinction between narrative, on one hand, and evidence of causality or ‘facts’ on the other; between a consensus view of tolerable taxation (e.g. amongst the financial sector and broader elite) and the empirical basis for decision-making in our particular circumstances.
    The following is clearly a value judgement, rather than a statement of fact: “SA is already an overtaxed society”. If you can’t own this as opinion, you are in no position to label others bound by ideology.
    Statistics do not state what an appropriate level of taxation is for South Africa, either at the aggregate level, or with regard to a particular portion of our uniquely unequal society. One may infer from statistics how the super-rich may respond to an attempt to tax their wealth and this points to the importance of careful design and consideration of the global context, but this is narrative rather than something one must be willfully blind not to consider immutable.
    Similarly for ‘value-for-money’ arguments: the poor performance, corruption, and “the level of [SA’s] services”, are certainly relevant to the efficacy and legitimacy of taxation, but to bring these to bear just on this proposition for tax reform or augmentation does not help to interrogate the merits of a wealth tax as a means for raising revenue in SA.
    This leaves us with the one pragmatic argument against a wealth tax, which is certainly pervasive: If you move to tax the super-rich in our globalized financial system, you risk that they’ll go elsewhere (just as income is already moved around to avoid tax, which is one motive for targeting wealth).
    The appropriate response to this is what Dennis Davis points out in his linked piece: “The challenge is to obtain data on wealth patterns and the owners thereof …and then set up a viable collection system.”
    One should differentiate between recognising a tendency and a risk (or pragmatic challenge) and feeding the narrative that amplifies that risk, while undermining attempts to address inequality; a narrative that implies that all of the wealth of the super-rich is derived purely from their own or their ancestors ‘work’ and that they are entitled to their immense privilege.

  • Due to corruption and the inevitable systemic incompetence of public sector personnel engaged under the ideological guidance of the National Democratic Revolution, middle class and wealthy South Africans pay the highest taxes on the planet. Aside from the very high rates of direct taxation, this sector of the population also pays for a parallel economy to obtain workable services in the security, health and education. This is also the sector of society that is the most productive. Incentivizing this vital and shrinking portion of the population to emigrate through further punitive taxation is socialism at its worst.

    • A wealth tax (of any credibility) should target the super-rich and NOT the middle class (not even the upperest-middle) i.e. less than 1% of the population.

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