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Wealth tax unlikely to bring in huge revenue

Apr 30 2017 07:49
Justin Brown And Dewald Van Rensburg

Johannesburg - Huge changes are unlikely to result from the Davis Tax Committee’s investigation into the possibility of imposing another wealth tax, given the expense involved in administering such a duty and the fact that it will not bring in that much revenue.

It was former finance minister Pravin Gordhan who proposed such an inquiry, as the need for the state to find new sources of revenue became more pressing.

South Africa has three forms of wealth tax: estate duty, transfer duty and donations tax. These bring in 1% of tax revenue.

A wealth tax, as opposed to an income tax, is based on the market value of assets.

The Davis committee said its investigations into possible wealth tax options were prompted by a “highly unequal” distribution of wealth in the country.

Kyle Mandy, the head of tax technical at PwC, referred to the work by French economist Thomas Piketty on wealth and income inequality, saying it had piqued local politicians’ interest in introducing a wealth tax.

Even though the subject of such a tax is highly politicised and emotionally charged, this latest leg of the committee’s inquiry into the revenue system is unlikely to produce anything wildly transformative.

The public has until May 31 to make submissions to the Davis committee regarding three new wealth taxes: a land tax; a national tax on the value of property in addition to municipal rates; and an annual wealth tax.

Ingrid Woolard, a member of this committee and an associate professor of economics at the University of Cape Town, said: “The simplest form of it would mean taxpayers drawing up an annual balance sheet of their assets and liabilities to get a net wealth, which then gets taxed at some percentage.”

Wealth taxes can target fixed property, cash in the bank, share portfolios and retirement savings, but would almost certainly exclude personal vehicles or valuable personal possessions such as jewellery.

Either way, the implementation of such a tax would tend to rely on a high degree of voluntary declaration.

Woolard suggested that expectations that a wealth tax would significantly boost state coffers were unrealistic.

“A lot of countries have tried to administer a wealth tax, but it is difficult and expensive to do,” she told City Press.

“No country gets lots of revenue from wealth taxes.”

Mandy said countries with annual wealth taxes included France, Argentina, Uruguay and Colombia.

“Annual wealth taxes contravene an important tax principle – that tax should be levied at a time when it is most convenient for the taxpayer to pay the tax,” he added.

“If you do not have the cash to pay the wealth tax, then it becomes a burden.”

Woolard said estate tax, on which the Davis committee had already made its pronouncements, was the most promising of the three proposed wealth taxes from a tax revenue perspective.

Last year, Judge Dennis Davis suggested that a true wealth tax in South Africa would have to cover the income of retirement funds – something South Africa abolished in 2007 to instead incentivise retirement savings.

That leaves property. Tax on fixed property was mooted in the previous review of the tax system conducted by the Katz Commission in 1996.

The idea had been supported and was implemented – the municipal property rates system, introduced in 2004, is a “land tax”.

Mandy said the Davis committee could examine a “full-blown” national land tax only on the value of land, excluding any improvements.

“By taxing land, you will force people to use land productively rather than land being held for speculation. It will also make land more affordable,” he said.

However, a land tax would affect the financial system because a property that was mortgaged would lose value if taxed, placing the banks at risk.

A land tax could also result in problems with valuation, added Mandy.

“The various municipalities have different valuation methodologies and different values at different times ... Now you need to have a single valuation roll.”

The proposal for a national tax on the value of property, in addition to municipal rates, seemed as if this could be a surcharge on municipal property rates, he added.

Transfer duties appear to be the most likely target for recommendations by the Davis committee. South Africa’s existing taxes on wealth brought in a total of R16 billion last year, of which R8 billion covered transfer duties.

“I think transfer duties distort the property market, so maybe there can be a way to replace that with a different property tax,” said Woolard.

“You would want to be very progressive with the structure. You do not want to tax a R200 000 RDP house,” said Woolard.

The problem with extra property taxes would be that national government would then start interfering in the major source of funds for local government.

Woolard said the Davis committee would probably report on its wealth tax recommendations by as early as September or before the end of the year.

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