The Davis Tax Committee (DTC) recently published its final report on the feasibility of introducing a proposed new wealth tax in South Africa.
This article provides a summary of the DTC key findings and recommendations.
The report had four main objectives:
The DTC is advisory in nature and makes recommendations to the Minister of Finance. The Minister will take into account the report and recommendations and will make any appropriate announcements as part of the normal budget and legislative processes. As with all tax policy proposals, the proposals will be subject to the normal consultative processes and parliamentary oversight once announced by the Minister of Finance.
The rationale for a wealth tax
Wealth inequality in South Africa is a threat to social stability and inclusive growth
Empirical evidence suggests that in South Africa, wealth inequality (with a Gini coefficient above 0.9) is extremely high and is, in fact, not just higher than income inequality (which has a Gini coefficient of 0.67) but also higher than global wealth inequality. The Gini coefficient is a measure of income inequality, ranging from 0 to 1. A value of 0 represents a perfectly equal society and a value of 1 represents a perfectly unequal society. It is therefore timely for South Africa to consider a range of ways in which wealth inequality can be reduced.
The considerations that arise from an assessment of the existing tax base
We need to take stock of recent developments and the current tax base
The adverse consequences of wealth taxation such as capital migration, disincentives to save, and the effect on entrepreneurship and employment must be thoroughly considered. Income streams arising from wealth are today taxed on a far wider base than 20 years ago, so it is necessary to take stock of recent developments and the existing tax base. Below is a summary of the DTC’s key findings.
The DTC recommendations
We need to address specific challenges before implementing any further wealth tax
The DTC suggested that while a recurrent net wealth tax may be an admirable and desirable form of wealth tax, we need to first address the challenges and unintended consequences of further wealth taxes before implementing them. This is essential to ensure that any such tax is well-designed and will yield more revenue than the cost of administration. The legislative and administrative processes required for both SARS and the taxpayer will be significant and must not be underestimated.
To create a wealth tax, we must consider the current tax base and have better data and admin
The process of creating a wealth tax needs to start with the consideration of a very simple form of annual net wealth tax. The decision however cannot be made without:
The DTC recommends that the focus should initially be on increasing estate duty collections
Their view is that their previous reports and recommendations about Estate Duty have not been implemented fully, even though the administrative capacity already exists.
While we have existing wealth taxes, there are other tools to address inequality
South Africa has existing wealth taxes in the form of Transfer Duty, Estate Duty and Donations Tax. These currently raise very small amounts of tax revenue. A wealth tax is not, however, the only available instrument to address income and wealth inequalities. Other ways to address inequality include land reform, programmes on the expenditure side of the fiscal budget such as increased access to quality health and education, and the provision of infrastructure and effective government to improve growth and employment. A decrease in unauthorised and wasteful government expenditure and enhanced tax morality will also help.
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