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/.