In April 2018 the Davis Tax Commission released its report. The Commission was implemented by former Minister of Finance, Pravin Gordhan. Tax – and wealth tax particulalry – is a complex issue. However, at the very heart of tax issues is the question Paulina French asks: Are we willing to cross the road to a more equal and just society?
The question of tax is a debate that has been going on since 17 July 2013 when the South African public were told that the Davis Tax Committee had been commissioned by the former Minister of Finance Pravin Gordhan. The Commission’s main objective was to review the role of the tax system in addressing the issues of unemployment, poverty and inequality. Five years have passed and not much has changed in our country from a political and social perspective. The wealthy are wealthier and the poor are poorer and still waiting for government to deliver on all the promises made as early as 1994.
South Africa, up until about two years ago, had one of the most efficient and well-run revenue collection systems in the world. But, with the slow deterioration in the management of the systems in place due to questionable management and governance decisions, the fiscus has been eroded. Tax-collection has not been what it should be to enable government spending on projects needed to improve the lives of the poor. As a result, the 2018 Budget delivered some very bad news for South Africans who live in dire poverty. Meanwhile, for the top-end of the income category, not much has changed. The debate on a net wealth tax continues and many questions have been asked as to why this was not introduced this year.
Net wealth tax is not an easy tax to understand. When speaking to “non-financial” people you will come across various definitions, some of which are not accurate. In simple terms, a net wealth tax is a tax that is levied on an individual’s gross net worth. Gross net worth is the difference between the sum of all gross assets and the sum of gross liabilities at a particular point in time. The method of valuing these gross assets and liabilities can become incredibly complex. Consequently, the implementation of such a tax becomes cumbersome and administratively difficult due to the high level of technical skills required by both the taxpayer and the revenue administration.
The Davis Tax Committee report deals with net wealth tax very comprehensively and if you have not read the report I urge you to. It will bring to light just how complex a tax it is to implement. It will also make it very clear that most politicians that are using the term “wealth tax” do not understand what the tax would entail, and what the ramifications of imposing such a tax would be.
We must also not forget that wealthier South Africans are already paying some form of wealth taxes in the form of Estate Duty, Donations Tax and Capital Gains Tax, to an extent. None of the politicians that I have heard talking about such a tax have mentioned that there are a number of countries who have dropped wealth taxes altogether. Austria, Denmark, Germany, the Netherlands, Finland, Iceland, Luxembourg and Sweden dropped the tax. France, Norway, Switzerland and Spain are currently the only OECD (Organisation for Economic Cooperation and Development) countries that levy a net wealth tax. These countries have very different economies to ours with a much lower level of inequality to ours.
Unlike the poor, the wealthy have options and one of the options includes where they will invest their capital. For a country like ours with economic downgrades still a potential, making debt more expensive, and economic growth even more difficult, we need all the capital we can possibly have in our country. We only need to look north of our border to get a good example of what the impact of massive capital outflows does to an economy.
Pope Francis, a well-respected figure, not only in religious circles but as a person who many look up to for leadership, has been quite vocal around the issues of economic equality in society. In a preface to a book published on his writings and talks published on 12 April 2018, entitled “Power and Money: Social Justice According to Bergoglio” he writes “It is possible: The fact that so many workers, entrepreneurs and administrators are already at the service of justice, solidarity and peace confirms that the way of the truth, charity and beauty is arduous, but practicable and necessary, even in economics and finance.”
As a country, we are at a crossroads, and we need to collectively decide whether we want to cross it with a better future in sight for all or only for a few. It is evident that we have good policies in place to benefit the fiscus, but our real challenge lies in how the collected funds are utilised. Creating a balance between collecting enough revenue from those who have wealth, without destroying the potential capital inflows into the country, is a difficult task. On the other hand the question must also be asked of those who do have wealth: Are they willing to cross the road to a more equal and just society? Or will they walk away leaving the books unbalanced?