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.
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I don’t know what the Laffer Curve means and can’t remember when last I saw a Lamborghini (or any of the other cars Davis listed). Admittedly I haven’t been to Plett recently so maybe I’m speaking out of turn. But I do have a house in the Cape Town CBD and so must therefore by all definitions be rich. But I’m not. I’m buckling under taxes direct and indirect and all my other commitments. I dread my tax consultant’s next email and so for Davis blithely to argue that I must pay more when I cannot afford to pay what I’m already expected to pay, and when I know it wasn’t I who broke Sars and it wasn’t I who looted this country drives me to despair if not, ultimately, suicide
Surely the quickest and most effective route to putting more cash in the government’s pocket to pay for basic services is to stop the rampant corruption, fruitless and wasteful expenditure; rather than take more from honest citizens.
Exactly!!
I think its really important to define who would be impacted by the wealth tax. At this point it sounds like another assault on shrinking the middle class (around 20% of population, of all races)…and they are the ones keeping SA afloat in general. And while one can gladly have a discussion about whether policy should serve the majority or minority, the minority cannot be made to ensure the welfare of the majority as suggested by the author. Successful social political systems all rely on a large functioning tax base, high employment figures which simply do not have. And to then forget the rampant corruption and inefficient government in this equation, seriously distorts this article.
While Davis happily accepts his salary every month for life paid for by these demonized
tax payers.Why doesn’t he takes a salary cut? Why doesn’t he address the causes of poverty in the country: corruption ,criminality , incompetence ,overpopulation , BEE.
You’re missing the point of what Judge Davis is saying. There is a structural inequality at the core of South Africa’s economy. There’s not just one way to fix it. He is not saying corruption in the public sector isn’t problematic – nor in the private sector, for that matter. What he is saying is that those factors exacerbate the problem. One way of tackling it is through taxation. One of the anomalies of South Africa is that a (racial) minority legally had access to wealth and supported the majority whilst benefitting from infrastructure that mostly excluded the majority. (Which is how we get to “BEE”, btw). And yes, in normal capitalist democracies, taxation is a moral imperative. It is furthermore empirically demonstrable that societies where the broad population have access to infrastructure, education and opportunity (which can lead to generational wealth) have fewer offspring. Davis is being sensible. Please respond with your brain rather than your knee.
Craig: please explain the leap of logic in what you said : “ He is not saying corruption in the public sector isn’t problematic… he is saying is that those factors exacerbate the problem. One way of tackling it is through taxation.”
???? So the more corrupt a government, the higher its wealth taxes should be?
Stopping incompetence and corruption will yield far more than additional taxes, and benefit the poorest of the poor.
The Laffer Curve is right at the extremes but only partially right over the whole curve.
If the tax rate was zero you would get 100% compliance and maximum entrepreneural incentive but if the tax rate was 100% you would get maximum evasion and zero entrepreneural incentive.
I’m not sure if the difference between 40% and 45% would have much affect on conpliance but above that it would certainly deter new risk taking. Imagine a mature investor considering a venture where he has to weigh up the usual risks of capital expendicture, leases, loans, employing staff, security, competition and market acceptance, and the fact that if unsuccessful he could lose evening but if successful his profit would be more than halved by tax. Rather like saying the odds of winning a colour bet at roulette would be 30-70 instead of 50-50.
Is it true that the super rich are leaving California? Why?
This is an argument that’s been going on for hundreds of years with no resolution in sight. The first thing to acknowledge is that we are all born of the same stock but no two people are born equal and have equal opportunities. The best we can hope for is a social system that encourages a degree of compassion whereby poor people are at least looked after in a humane way. We certainly won’t get there by listening to the far right or far left but surely we can collectively adopt a system that allows talented people to make lots of money and at the same time recognise that they need to care for those less fortunate then they are.
Davis is (unsurprisingly) defending his indefensible position – surely even he can see the spiral we’ve already descended?
One has to question the learned judge’s judgement. While the bulk of the 60 million continue to vote for the corrupt ANC regime, no amount of additional tax will begin to address the systemic ineffectiveness and inefficiencies of our institutions. All more tax will do is to prop up a failed regime for a little longer. If the judge has an issue with conspicuous consumption he could quite easily propose a system of arbitrary tax assessment as was practised in Iran in the heyday of the Shah where corruption was endemic as it is in South Africa. Quite simply lifestyles were compared to declared income and the Finance Ministry would issue a demand for taxation. There was a right of appeal, after payment, at which the taxpayer could present his case. The prospect of arbitrary assessment certainly ensured that the majority of the wealthy kept their tax affairs up to date. In SA one could begin by looking at the cronies, “friends” and families of those holding the reins of government.
It seems to me that the article’s argument and the rebuttal both avoided talking about a wealth tax as such.
In a country run – badly – by a dynastic criminal enterprise, rational arguments about tax are a waste of energy and time – both of which SA is running out of. When government starts talking about taking people’s accumulated capital in addition to a big chunk of their earnings, and does so in order to pay for their overstaffed and inefficient bureaucracy and pet projects, it is time to plan for emigration.
In a country that is short of skills, and which refuses to make best use of the skills it has (EE/BEE), that is a short route to suicide.
Help the poor? That is not what this is about. It’s about getting the poor to vote for their own impoverishment.
Herein lies the tragedy: ‘When government starts talking about taking people’s accumulated capital in addition to a big chunk of their earnings, and does so in order to pay for their overstaffed and inefficient bureaucracy and pet projects, it is time to plan for emigration’.
Really well stated. I, by the grace of God, am one of the 103 000. My taxes are paid up (yes judge, really!!), and I pay the marginal 45% income tax, plus all the other direct and indirect taxes. I work full-time and am busy with a project for my retirement, where I employ 8 people (with about 25 dependants) without making any return as yet. So, judge, you and your ilk can come take a portion of my hard earned wealth, but I’ll bet my last cent the country will be worse off. It is one thing preaching tax theory from a high judge’s chair, but remember the law of unintended consequences…
A tax on wealth punishes savings. Consider for example the laughable solution penned by Aroop Chatterjee, which suggests a 3% (!) tax on assets starting at R3.6m. R3.6m in savings would only generate you a monthly income of R12k, using the famous 4% rule. That hardly puts one in the realm of the “super wealthy”, and the tax would simply erode and discourage savings amongst middle class.
Far better to implement a consumption tax. You want to get at the wealth that enables people to buy luxury vehicles? Then implement an appropriate consumption tax on Maseratis, Ferraris, Lamborghinis and Porsches. Taxing assets that are valued on paper only (e.g. shares) is stupid.
Those Ferraris etc belong to swallows. At least, the Cape Town ones do. They are seen in the late summer and autumn, then disappear again . Ergo , swallows.
Our focus should be on economic growth which will increase employment and therefore the tax collection base. Going after the rich may net some results, but ultimately they will look for more and more ways to avoid paying tax, or just emigrate, then we would have lost their tax completely and probably any enterprises they had that create employment. As Winston Churchill said “I contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.”
It is precisely because we ought to care about the 60 million that makes a wealth tax such a bad idea.
Our economy is in dire straits; we are as a nation grossly in debt and our government expends around 60% of it’d revenues just on paying government salaries.
You cannot fix our main problem, which is a failing government, brought to its knees by rampant fraud and corruption, where even simple plicing and law and order are incapable of being carried out, by increasing the tax take such that the voracious appetite of a vastly over-bloated public sector can continue to be fed, if, by so doing, you decrease even further any possibility of increasing savings and investment increases which are the ONLY way of permanently starting to move our country in the right direction.
Less taxation rather than more is our only hope for future economic gains, and a better future for the 60 million that Mr Davis refers to.
He may see many lamborghini cars in the circles in which he moves but he needs to get out and about amongst the peoples in the real world and spend less time hob-nobbing with the political and criminal classes. (nb; these categories are not mutually exclusive.)
The best way to reduce inequality is to stop having so many children if you cant afford it!
Most taxpayers will be quite agreeable to pay tax at a reasonable rate. The problem is the application of the tax paid to the anc rulers of SA. The money gets wasted and that which doesn’t go to waste ends up in the pocket of crooks like zuma.
I’m so impressed by all the comments here ….this has been one of the most interesting written debates I’ve seen in a long time. SARS and the current powers that be should use this article and response to it as a bellweather for action. If a government doesn’t heed the advice and opinions of its taxpayers then it is trouble. Thank you all for your great comments and observations.
Large numbers of high earning taxpayers, especially younger highly paid executives and professionals, are already emigrating. A wealth tax will simply exacerbate that problem.
When the rate of return on capital [let’s say “r”] is greater than the rate of economic growth [let’s say “g”], over the longer term, the result is the owners of capital get richer. But those less fortunate souls reliant on economic growth also get richer, just not at the same growth rate. This gap is infinitely exacerbated when the “g” falls below zero … . Now the Honourable Judge and other assorted egalitarians want to address the differential in these growth rates by artificially curbing the “r” instead of pushing the “g”, because curbing the “r” is just so much easier, and is ever so populist. But that’s where they lose the plot – because the more you drop the “r” through taxation / redistribution, the more you drop the “g” through capital migration.
Maggie Thatcher once said: “The trouble with socialism is that eventually you run out of other people’s money”. Go Judgy boy.
there are numerous challenges with a wealth tax.
Would retirement savings be added to wealth? Johnny has R15m sitting in his pension fund for when he retires but it is not on his wealth sheet now. Mary has no pension but she has a R15m equity portfolio….
How will a tax deal with structures? Jane is beneficiary of a discretionary trust with R15m in it. Will trusts and trust-owned companies be subject to wealth taxes?
Will values be tax base cost or market value?
Where will the liquidity come from to pay a tax on the value of shares in private companies?
Then lastly remember The Law of Large Numbers. Let’s say the total wealth of the top 100,000 is about R3,000 billion. Confiscating ALL of their wealth (why stop at 3%) would give the other 60 m people less than a year of minimum wage. And then? Where will the 60m get a salary next year?
That, my dear Judge, is the essence of the socialist approach – even though our cake is so unequally divided, it is also far too small to sustain all of us, even if it were equally divided. By all means, go after those pesky tax dodgers and recover that which is legally due to the state. But to think that you can help the 60 million out of their misery by redistributing a portion of the wealth of the 103 000, is a fallacy. Far better to consider ways to grow the cake. And you know what, those of us who are deeply invested in this country would gladly assist in this endeavour – so I suggest you do your bit by helping us to get rid of the criminals, corrupt politicians first.
Initially, up until about the beginning of Zuma, this new ANC government was doing OK. Electricity and piped water was being rolled out all across the country. International investment was available. Taxes were significantly lower than they are now. Employment was growing. Bureaucracy was a pain, but it was almost working, and drivers licences, passports, identity documents, marriage certificates could be obtained in a week or two. And that was achieved by 60% of the bureaucracy we have now. And then Zuma legitimised corruption. This isn’t about not getting enough money in and debating how to get more money in Judge Davis, this is about using what comes in properly. If Economics 101 says your expenditure has to be less than your earnings, Economics 102 says if you want to increase your earnings you have to provide value for money. Judge Davis fails to see that no tax increases will fix South Africa as long as we have senior ANC “leaders” who do nothing to stop corruption, as long as we keep pouring hundreds of billions into failing SOEs, as long as the ANC keeps ignoring the country’s tax payers in favour of its own pocket and in favour of those who are likely to keep voting it into power, as long as we live in an expensive bureaucratic mess. Increasing taxes will do nothing until all these things are fixed, and then increasing taxes will be unnecessary, because the ANC will suddenly discover that there is actually enough tax revenue.
It is pretty obvious that the interests of 60 million will trump the interests of 100,000, especially in a country where the 60 million are sold the ideological garbage of the ruling cabal of crooks and gangsters that but for the self serving and greedy capitalists the country would be Nirvana. Never mind that no amount of tax will ever be enough to satisfy the voracious appetite of the pigs that feed from the trough – tax that will NEVER reach the 60 million. We would tax most of 100,000 into poverty and dependency on the state (not that there is any state support once the looting has taken place), rather than do the hard work necessary to uplift the 60 million because it’s a much easier sell. Not one iota of value is added by our ruling party and their bloated, overpaid and inefficient public sector, in fact there is a negative utility associated with the public sector and the tax to support this ever growing and demanding pond of leeches is successfully crowding out the private sector.
The answer should surely be to incentivise everyone to invest and contribute to the extent possible with the intention of growing the economy by:
Doing away with BEE, EWC, NHI, any talk of a wealth tax and minimum wage and diminishing the power of the unions;
Use SAPS and NPA resources to arrest and prosecute those who have looted with impunity and use SARS resources to aggressively recover that which has been stolen from the people of this country;
Incentivise the private sector to risk capital, apply their intellect and energy and create jobs;
Tax consumption, and use the tax for education, to support the most deserving (the aged, mentally and physically incapacitated not those able, but unwilling to take a job), for investment into productive infrastructure, to support a competent and professional police service to get crime under control and improve the capacity of public healthcare;
Reduce the size and wage bill of the public sector;
Let the vanity SOE’s like SAA fail.
These are some of the things we need to do, and requires the 60 million to vote the corrupt crime syndicate out of power. Recognising that there is little to zero chance of that happening and we are all therefore on a one way road to ruin, the 100,000 should do what they need to do to protect their hard earned asset base. The refrain across Africa is that there is limited capital formation as ‘Government has eaten our money’… it seems this is destined to be SA’s future refrain as well.
A wonderful debate below and as much as I enjoy Judge Davis, I am certainly not persuaded by his argument here. But I have no wish to repeat every one else’s great arguments. What I have not seen mentioned by judge or his critics below, at least not directly, is the fact that a huge part of SA’s economy is underground and pays no tax at all. I have personally seen the “kwara-kwara” stores in small platteland towns that ran the older businesses out. How can you compete if you pay minimum wage or above, VAT, PAYE and SITE, and whatever I missed in that, when your competitor from China, or Somalia, or elsewhere, pays none of that crazy stuff. The owner of a small shop in Tarkastad told me how he could not buy certain products wholesale at the price for which his competitors are selling those same products retail. It is the same in many places. I see people flashing around conspicuous wealth, I have even dealt with some of them for business. Prices are in cash and there are no invoices. I have ven asked about the tax, and they smile – clearly they think tax is for idiots. The problem is that we have (and SARS) have no idea how big this parallel economy really is and as long as everyone is corrupt, it will flourish because its members have ready cash for bribes. Why queue half the day for a government service dispensed by a bored and dismissive civil serpent, when you can simply pay someone and the problem goes away. In many ways it is like the rules of the road. The more you see others around you ignoring them with impunity, and getting ahead of you (is there anything worse?), the more tempting it is to emulate those “smart ones” – and soon even moms driving kids to school are driving like Taxis. Its the same in every part of life. By going after the law abiding taxpayer, you simply increase the incentive for him to join the underworld. I wonder how warm and fuzzy the billionaires (who were barely acknowledged) who donated a Billion Rand each to help with the effects of Covid (which, it seems, were promptly stolen) feel when they read an article like this. The other point of course is value for money – what do those 100 000 get for their tax? Nothing, except a few more bureaucrats to make their lives more inconvenient while pretending to be working.
Wow!! Look at all these comments. Popular topic!! I’m sure most of those commenting would lament South Africa’s reputation of having the second highest gini coefficient on the planet. But if there is any serious and practical suggestion to spread our wealth a bit more equally? No-way. I’m all right Jack.
Ha, ha – how about you leading the way Jack?
Taxing a society more to cover the ineptitude of those that rule is akin to climbing into a bucket and trying to lift yourself off the ground by pulling on the handle. It sounds like a good idea that doesn’t work.
Judge : very easy start to understanding wealth patterns vs taxable income and fixing the disparity : tax any use of any asset at below market value as a deemed fringe benefit regardless of an employment relationship. So if Denny lives in a Claremont apartment owned by the grandpapa’s trust, that is a deemed R15k per month income. Any expense of any kind in a trust or company should be taxable in the hands of the recipient or asset user. I suspect this change in law will face some difficulty passing a vote in Parliament…
then require the ENTIRE board of a company to sign personal unlimited liability that the value of inter-company charges to that postbox in the Caymans is indeed fair and arms-length. You will gather tens of billions from just that.
That, my dear Judge, is the essence of the socialist approach – even though our cake is so unequally divided, it is also far too small to sustain all of us, even if it were equally divided. By all means, go after those pesky tax dodgers and recover that which is legally due to the state. But to think that you can help the 60 million out of their misery by redistributing a portion of the wealth of the 103 000, is a fallacy. Far better to consider ways to grow the cake. And you know what, those of us who are deeply invested in this country would gladly assist in this endeavour – so I suggest you do your bit by helping us to get rid of the criminals, corrupt politicians first.