INEQUALITY in South Africa is rife, with millions living in poverty and informal settlements like this one, and a small percentage enjoying the country’s wealth. A wealth tax may be the answer, say the writers.     African News Agency (ANA)
INEQUALITY in South Africa is rife, with millions living in poverty and informal settlements like this one, and a small percentage enjoying the country’s wealth. A wealth tax may be the answer, say the writers. African News Agency (ANA)

Covid-19: Why SA now needs a wealth tax

By The Conversation Time of article published Apr 30, 2020

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Pretoria - The consequences of the Covid-19 lockdown are yet to be fully determined and understood. But one thing we can be fairly certain of - in South Africa its impact will be shaped by the country’s inequalities.

Our study reveals that half of the adult population survives with near-zero savings, while 3500 individuals own 15% of the country’s wealth. The response to the crisis must take this into account to help the most vulnerable while still safeguarding fiscal sustainability.

Based on our new study on wealth inequality in South Africa, we propose a progressive solidarity wealth tax. This would allocate the fiscal burden of current interventions to those most capable of paying.

We show that a wealth tax on the richest 354000 individuals could raise at least R143 billion. That equates to 29% of the announced R500bn fiscal cost of the relief package.

Unequal distribution

Many studies show how extreme income inequality is in South Africa, but little has been documented about wealth. Net wealth is the sum of all assets less any debts.

Assets include cash, bank deposits, pensions, life insurance, property, bonds and stocks.

In our new paper, we combine national accounts statistics, household surveys and exhaustive tax microdata to assess the reliability of available data sources. We also provide the most comprehensive possible picture of the distribution of wealth. Three key results are worth mentioning.

First, in 2017, the richest 10% of South Africans (all adults with a net worth over R496000) owned 86% of wealth, with an average of R2.8 million per adult. In contrast, about 18million (the poorest 50%) were either in debt or had near-zero savings. With an average net worth of R486m, the richest 3500 owned 15% of wealth. This was more than the 32 million poorest altogether.

The richest 10% owned 99.8% of bonds and stock - which accounted for 35% of wealth. The top decile also owned 60% of housing wealth and 64% of pension assets. Housing wealth amounted to 29% of wealth and pension assets to 33%.

Why wealth inequality matters now more than ever

Our findings are particularly relevant to the current crisis. South Africans are unequally armed to survive the contraction of the economy produced by the lockdown.

Before the lockdown, about half of the population was already in debt, or had near-zero net wealth. Therefore, this crisis will at best sink millions of people further into indebtedness or force them to beg, loot or starve. Conversely, our paper shows that a minority of individuals are in a much less vulnerable situation.

The policy solutions needed to absorb the shock and recover fast must be carefully designed. They need to reallocate resources to give everybody equal chances to survive the shock.

In the spirit of solidarity, a wealth tax could be part of the solution to safeguard long-run fiscal sustainability and inclusive growth.

How much could a wealth tax raise?

We propose a progressive wealth tax, which would apply only to South Africans with a net wealth currently superior to R3.6m, that is, the richest 354000 (1% of the adult population).

The first bracket - all wealth between R3.6m and R27m - would be taxed at a 3% rate; the second bracket (R27m to R119m) at 5%; and all wealth above R119m at 7%.

Individuals with less than R3.6m would be exempt.

A billionaire would face a 6.7% tax rate: she would pay 3% on the fraction of her wealth higher than R3.6m but lower than R27m; 5% on wealth higher than R27m but lower than R119m; and 7% of the R821m she owns above R119m.

This would leave her with post-tax wealth of R933m.

Other tax schedules could of course be designed. The objective here is to give an order of magnitude of the expected revenues.

A realistic policy

Critics of a wealth tax argue that it would be too costly and complex to implement.

But South Africa is well positioned to administer this tax cost-effectively.

First, the tax base we consider covers very few individuals, reducing the administration required.

Second, South Africa already has in place third-party reporting by financial intermediaries straight into the South African Revenue Service, providing information on capital income and ownership. Existing municipal valuations could be used to value property assets. This would cover the major components of asset holdings, especially stocks and bonds.Capital flight, through off-shoring or migration, is a potential risk. We account for this by making conservative assumptions about avoidance and evasion, and still project sizeable revenues.

In light of the lessons learned from the Zondo Commission of Inquiry into State Capture, taxpayers would need guarantees that this special tax will be properly collected and spent.

When designing the radar for Britain during World War II, physicist Robert Watson-Watt justified his choice of a non-optimal frequency as follows: Give them the third best to go on with; the second best comes too late, the best never comes.

This radar was pivotal in allowing Britain to overcome a larger, more sophisticated German air force.

In our situation, we cannot let perfection be the enemy of progress, or in this case, survival. The Conversation

Chatterjee is research manager: wealth inequality, Southern Centre for Inequality Studies, University of the Witwatersrand. Gethin is Research Fellow, World Inequality Lab, Paris School of Economics. Czajka is Research Fellow, World Inequality Lab, UCLouvain.

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