Inequality vs Disinvestment: The case for a South African Wealth Tax

Inequality vs Disinvestment: The case for a South African Wealth Tax

Last week, Minister of Finance, Enoch Godongwana, delivered his maiden Budget Speech and, like many economists, I was eager to delve into the country’s financial standing. I was equally eager to attend Mazars Budget Analysis, a virtual event that took place the day after Budget 2022. The event, cleverly entitled From Viral Dis-ease to Sustainable Growth, provided expert, between-the-lines analysis of the National Budget. Among the financial successes and failures that were reiterated and the potential consequences of the Russia-Ukraine conflict that were alluded to, one area of the analysis remained with me – the mooted wealth tax and potential to reach it in South Africa.

The 2022 Budget Review indicates, inter alia, that provisional taxpayers with assets more than ZAR 50 million are expected to declare assets and liabilities at market value for their 2023 returns. Previously, the declaration would have been at cost rather than market value. This change is expected to assist with the detection of non-compliance or tax fraud.[1] It has also been speculated that another implication of government’s new requirement is that the information gathered may be used in the formulation and implementation of a wealth tax in South Africa.[2] Given the deep inequalities which plague South African society, the desire to implement such a tax is unsurprising, but the broader implications could prove harmful.

In 2019, almost three decades into its democracy, South Africa was recognized as the most unequal country in the world.[3] Figures indicate that the top 10% of the country’s earners take home 65% of total income, while 90% get the remaining 35%. Similar inequalities are apparent in wealth – the top 10% controls 93% of the country’s wealth while the other 90% controls a mere 7%.[4]  Inequalities are also found to perpetuate on racial, gender, and spatial grounds.[5] Between 2011 and 2015, whites earned an average monthly salary more than three times that of Africans, females earned 30% less than males, and individuals in Gauteng and Western Cape had the highest provincial annual mean and median expenditures while those living in Limpopo and Eastern Cape had the lowest.[6]

Figure 1. Earnings among South African race groups

Source: Own computation using information from Stats SA 2020.

Notes: The figure above displays mean real monthly earnings among South African race groups over the period 2011-2015.

Exacerbating the issue of inequality in South Africa were the harshest days of the COVID-19 pandemic and the nationwide lockdown which followed. In terms of access to water and sanitation, job security, education, internet access, and food security, the hard yet much-needed response served to highlight and indeed, deepen the gross divide between those with and those without.[7] Thus, the driving force behind the implementation of a wealth tax should be to narrow this divide. At the same time, however, it may serve to drive investment to other destinations, further dampening the country’s economic growth prospects. Over the last decade, approximately 4,200 high net-worth individuals left the country, and the prospect of higher taxes may cause this figure to grow.[8]

Should the South African government be certain about the implementation of a wealth tax, stringent monitoring is a key requirement. The South African Revenue Service, due to the upskilling of personnel and investment in their information and communications technology (also discussed at the Mazars event), may very well be able to pull this off. However, a cushion to the brain drain and disinvestment blow must be found. To this end, government must reinvest revenues received from the wealth tax in developments within the realms of water and sanitation, healthcare, energy, education, telecommunications, and stimulating innovation rather than simply handing the funds out. But even if these recommendations are followed and even if funds are correctly appropriated (which is a tough ask in South Africa), it may be long before the benefits materialize.

Nevertheless, credit must be given to the government for requiring provisional taxpayers with assets greater the ZAR 50 million to state them at market value as it will assist in determining the structure and distribution of wealth in South Africa[9], thus, allowing for better planning should a wealth tax truly be under consideration.[10]

[1] Business Tech, ‘Government knows wealthy taxpayers are leaving the country’, February 24, 2022, https://businesstech.co.za/news/finance/562204/government-knows-wealthy-taxpayers-are-leaving-south-africa-analyst/.

[2] Business Tech, ‘Government knows wealthy taxpayers are leaving the country’, February 24, 2022, https://businesstech.co.za/news/finance/562204/government-knows-wealthy-taxpayers-are-leaving-south-africa-analyst/.

[3] Khanyi Mlaba, ‘5 Shocking facts  that show why South Africa is the “most unequal country in the world”’, Global Citizen, November 27, 2020, https://www.globalcitizen.org/en/content/facts-why-south-africa-most-unequal-country-oxfam/.

[4] Dennis Webster, ‘Why South Africa is the world’s most unequal society’, Mail and Guardian, November 19, 2019,  https://mg.co.za/article/2019-11-19-why-sa-is-the-worlds-most-unequal-society/.

[5] Dennis Webster, ‘Why South Africa is the world’s most unequal society’, Mail and Guardian, November 19, 2019,  https://mg.co.za/article/2019-11-19-why-sa-is-the-worlds-most-unequal-society/.

[6] Government of South Africa, Department: Statistics South Africa, How unequal is South Africa?, (online), http://www.statssa.gov.za/?p=12930.

[7] Lauren Graham, ‘Pandemic underscores gross inequalities in South  Africa and the need to fix them’, The Conversation, April 5, 2020, https://theconversation.com/pandemic-underscores-gross-inequalities-in-south-africa-and-the-need-to-fix-them-135070.

[8] Business Tech, ‘Government knows wealthy taxpayers are leaving the country’, February 24, 2022, https://businesstech.co.za/news/finance/562204/government-knows-wealthy-taxpayers-are-leaving-south-africa-analyst/.

[9] Business Tech, ‘Government knows wealthy taxpayers are leaving the country’, February 24, 2022, https://businesstech.co.za/news/finance/562204/government-knows-wealthy-taxpayers-are-leaving-south-africa-analyst/.

[10] Amanda Visser, ‘Wealth declaration is not all negative’, Moneyweb, February 28, 2022, https://www.moneyweb.co.za/mymoney/moneyweb-tax/wealth-declaration-is-not-all-negative/.

The heritage of looting

My 27th birthday, this year, like last year’s 26th, was spent under lockdown. Unlike last year, however, the lockdown under which I found myself extended further than that related to the government’s response to the coronavirus pandemic. Instead, I was barricaded within the confines of my neighborhood as part of my community’s response to the July unrest which transpired in parts of KwaZulu-Natal and Gauteng.

In July 2021, South Africa experienced the worst bout of politically motivated uprisings since the advent of democracy. What began as a semi-peaceful demonstration outside the homestead of the former president, Jacob Zuma, quickly spiraled out of control, into all-out looting, arson, vandalism, and violence parade.

According to reports, the week of riots in South Africa could cost the country ZAR 50 billion in lost output, while approximately 150 000 jobs have been put at risk. Further casualties came in the form of approximately 150 000 informal traders and 40 000 businesses, 1 400 ATMs, 100 malls, 11 warehouses, and eight factories.[1] By July 18 it was reported that 3407 arrests were made and by August 3 it was reported that 342 lives were lost.[2],[3]

Although these actions were, initially, termed the “Free Zuma Protest”, it became apparent that additional elements were at play – those outside the strict realm of Zuma’s support base. We have since been informed that the unrests were part of an attempt to derail the state, orchestrated by a well-oiled machine that took advantage of the country’s constitution, made use of our nation’s criminal elements, and leveraged the desperation of the impoverished.[4]

While the meaningless destruction of property, intimidation of people, and incitement of violence cannot be excused, one would find themselves at a moral crossroad if they were to group together the poverty-stricken looters with the criminal elements behind July’s rampage. Undoubtedly, such a crossroad would arise when one considers that the participation of the desperate in the heinous activities, which led to the costs described above, could very well have been a side-effect of looting at a higher level – looting of the state.

It was this notion that quelled the disappointment of a birthday spent under an even harder lockdown than that imposed by the government. I found myself asking the question, how much anger could I have toward impoverished looters when the country’s (former) health minister, during a global health crisis, in a country with the deepest of inequalities, was found to have channeled ZAR 150 million of department funds to his cronies from which his family was shown to have benefitted or when a former member of the National Health Laboratory Services (NHLS) recently appeared in court for tender fraud?[5],[6] The answer was that I couldn’t hold any anger. Why? Because the actions of the impoverished looters were merely a reaction to the actions of some of our leaders.

This brings me to my conclusion. As we prepare to celebrate our 27th Heritage Day as a democratic nation, we must remember that among the brilliant myriad of cultures in South Africa, there exists a few which we are better off without. In this regard, that is a culture of corruption and heritage of looting.


[1] S’thembile Cele and Leah Wilson, ‘South Africa economy set to take $3.4 billion hit from riots’, Bloomberg,  https://www.bloomberg.com/news/articles/2021-07-20/south-african-economy-set-to-take-3-4-billion-hit-from-riots

[2] Kyle Zeeman, ‘Three alleged instigators of violent unrest arrested and expected in court this week’, Timeslive, July 18, 2021, https://www.timeslive.co.za/news/2021-07-18-three-alleged-instigators-of-violent-unrest-arrested-and-expected-in-court-this-week/.

[3] Paddy Harper, ‘Phoenix killings: 22 suspects held’, Mail and Guardian, August 3, 2021, https://mg.co.za/news/2021-08-03-phoenix-killings-22-suspects-held/.

[4] Andrew Harding, ‘South Africa riots: The inside story of Durban’s week of anarchy’, BBC News, July 29, 2021,  https://www.bbc.com/news/world-africa-57996373.

[5]Pieter-Louis Myburgh, ‘SIU flags ‘corrupt’ payment into Department of Health staffer’s bank account’, Daily Maverick, September 14, 2021, https://www.dailymaverick.co.za/article/2021-09-14-siu-flags-corrupt-payment-into-department-of-health-staffers-bank-account/

[6] ‘Former NHLS CEO charged in R113 million tender fraud case,’ SABC News, September 6, 2021, https://www.sabcnews.com/sabcnews/former-nhls-ceo-charged-in-r113-million-tender-fraud-case/.

SMEs and women-led businesses must leverage the benefits of the AfCFTA

SMEs and women-led businesses must leverage the benefits of the AfCFTA

The African Continental Free Trade Area (AfCFTA) was formed with the intention of boosting intra-African trade to accelerate growth and facilitate investment on the continent. This was done with the pan-African vision of an integrated, peaceful, and prosperous continent. While the more established names within the trade space may very well be capable of capitalising on the potential gain from the agreement, the benefits of the AfCFTA are not confined to those at the very top of the industrial ladder. Small and medium enterprises (SMEs) and women-led, informal businesses have also been tipped as potential beneficiaries of the free trade area.

SMEs account for approximately 80{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} of Africa’s employment and 50{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} of its GDP. In South Africa, they provide employment to 47{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} of the workforce and account for around 20{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} of GDP. In terms of informal cross-border traders, women account for around 70{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1}. Despite the large contribution to their relevant subcategories, these entities remain among the most vulnerable to economic shocks and their ability to engage in cross-border trade remains limited. Exacerbating these issues further, without a doubt, is the ongoing COVID-19 pandemic. Following the launch of the AfCFTA on 1 January 2021, this could likely change.

By reducing trade barriers and simplifying the trade process, the AfCFTA will enable African businesses to progressively gain access to the continental market. While it is not expected that SMEs will commence with immediate transcontinental trade, for those entities that are not quite adept at cross-border trade, the AfCFTA provides an opportunity to tap into regional markets before proceeding further. Likewise, for informal, women-led businesses, that currently face harassment, violence, and confiscation of goods and imprisonment, the AfCFTA will provide an opportunity to operate through more formal and well-protected channels. These will, in turn, allow for a scaling up of (international) business operations, an increase in innovation, and, where possible, embracing digitisation.

As expected, however, due to the small- and, often, the informal scale of operations, SMEs and related entities may not be fully capable of leveraging the benefits presented by the free trade area. This has not gone unrecognised by the AfCFTA or the relevant stakeholders. There have been calls from relevant national ministries for programs aimed at addressing the issues facing SMEs, such as market access, education, and information, financing and credit facilities,

The African Continental Free Trade Area (AfCFTA) was formed with the intention of boosting intra-African trade to accelerate growth and facilitate investment on the continent.  This was done with the pan-African vision of an integrated, peaceful, and prosperous continent. While the more established names within the trade space may very well be capable of capitalising on potential gains from the agreement, benefits of the AfCFTA are not confined to those at the very top of the industrial ladder. Small and medium enterprises (SMEs) and women-led, informal businesses have also been tipped as potential beneficiaries of the free trade area.

SMEs account for approximately 80{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} of Africa’s employment and 50{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} of its GDP.[1] In South Africa, they provide employment to 47{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} of the workforce and account for around 20{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} of GDP. [2]  In terms of informal cross-border traders, women account for around 70{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1}.[3] Despite the large contribution to their relevant subcategories, these entities remain among the most vulnerable to economic shocks and their ability to engage in cross-border trade remains limited. Exacerbating these issues further, without a doubt, is the ongoing COVID-19 pandemic. Following the launch of the AfCFTA on 1 January 2021, this could likely change.

By reducing trade barriers and simplifying the trade process, the AfCFTA will enable African businesses to progressively gain access to the continental market. While it is not expected that SMEs will commence with immediate transcontinental trade, for those entities that are not quite adept at cross-border trade, the AfCFTA provides an opportunity to tap into regional markets before proceeding further.  Likewise, for informal, women-led businesses, that currently face harassment, violence, and confiscation of goods and imprisonment, the AfCFTA will provide an opportunity to operate through more formal and well-protected channels.[4] These will, in turn, allow for a scaling up of (international) business operations, an increase in innovation, and, where possible, embracing digitisation.

As expected, however, due to the small and, often, informal scale of operations, SMEs and related entities may not be fully capable of leveraging the benefits presented by the free trade area. This has not gone unrecognised by the AfCFTA or the relevant stakeholders. There have been calls from relevant national ministries for programmes aimed at addressing the issues facing SMEs, such as market access, education and information, financing and credit facilities, access to innovative technologies, access to energy, infrastructure, and marketing networks.[5]

Considering the issues facing less well-established businesses, tangible attempts have been made at assisting smaller businesses improve their capacity. Among these is the recently launched eTradehub- a sort of “one-stop-shop” for small business to gain trade information and the related trade management tools. This online portal was launched by the Women Traders in the AfCFTA partnership with the intention of increasing the participation of women-led SMEs in the AfCFTA.[6],[7]

Almost equally as recent, MTN SA entered a USD 2 million partnership with the International Finance Corporation to broaden mobile financial services inclusion in South Africa. Although this partnership is not explicitly related to the AfCFTA, it is imperative that the intended beneficiaries capitalise on the potential gains to improve on their capacity to trade across borders.[8]

It is on this note that this piece concludes. Ultimately, all the efforts in the world would be in vain if there is no willingness, from the intended beneficiaries, to participate. As such, SMEs, and those representing them, are called to action to drive the inclusion agenda further.[9]

 

[1] Rilwan Akeyewale, ‘Who are the winners and losers in Africa’s Continental Free Trade area?’, World Economic Forum, https://www.weforum.org/agenda/2018/10/africa-continental-free-trade-afcfta-sme-business/.

[2] Simone Liedtke, ‘SME sector ‘critical’ to growing South Africa’s economy – Pityana’, Engineering News, April 11, 2019, https://www.engineeringnews.co.za/article/sme-sector-critical-to-growing-south-africas-economy-pityana-2019-04-11#.

[3] Nghinomenwa Erastus, ‘AfCFTA potential benefits to SMEs, women’, The Namibian, May 12, 2021, https://www.namibian.com.na/101588/read/Afcfta-potential-benefits-to-SMEs-women.

[4] Op. cit.

[5] APO Group, ‘South African women’s minister seeks voice for women in AfCFTA’, Africa News, https://www.africanews.com/2021/02/24/south-africa-s-women-s-minister-seeks-voice-for-women-in-afcfta/

[6] Women Traders in the AfCFTA is a partnership formed by the International Chamber of Commerce (ICC), Trade Law Centre (TRALAC), United Parcel Service (UPS), and West Blue Consulting.

[7] International Chamber of Commerce, ‘Launch of eTradeHubs to simplify trade processes for woman small business owners in AfCFTA’, https://iccwbo.org/media-wall/news-speeches/launch-of-etradehubs-to-simplify-trade-processes-for-woman-small-business-owners-in-afcfta/.

[8] Given Majola, ‘MTN’s MoMo gets its mojo in SA with IFC partnership’, IOL, May 20, 2021, https://www.iol.co.za/business-report/companies/mtns-momo-gets-its-mojo-in-sa-with-ifc-partnership-22b1472c-6057-4fcd-aaaf-8bf9fafb9b7f.

[9] ‘SAZ challenges women to grab AfCFTA opporutnities’, Chronicle, September 2, 2020, https://www.chronicle.co.zw/saz-challenges-women-to-grab-afcfta-opportunities/.