Implementing a wealth tax in South Africa could make room for a sizeable reduction in personal income tax, a leading economics analyst suggested on Monday.
It could also fund much-needed development, said Econometrix director and chief economist Dr Azar Jammine, speaking at the Institute of Retirement Funds Africa (IRFA) annual conference in Cape Town.
“There are rumours we are going to have an increase in the rate of VAT next year, to finance further economic development. Is there not a case for introducing a form of wealth tax in South Africa?”
In a proposal likely to provoke robust debate, he said the quid pro quo would be a reduction in personal income tax.
“There is currently about R16-trillion in this country, locked up in the savings system in assets. A mere 0.5% tax on those assets would generate R80-billion. That would be enough to reduce the top personal tax rate from around 41% to 35%.”
Such a reduction would encourage both ordinary workers and senior executives to work harder and generate more income, because they would pay less tax on the money they earned.
Jammine said the wealth tax could be paid similar to the way investors currently paid their asset managers an annual percentage to manage their investments.
“You would [also] give the government a certain percentage. I know there’s a huge danger here — and that is the risk that government might exploit the situation and not reduce personal tax, but just increase wealth tax.
“But it’s just an idea that needs to be pondered in order to generate more social equity, to bring about economic development.”
Jammine dismissed the notion of raising personal income tax to generate the funds needed.
“If you use income tax, you’ve got a huge problem in South Africa because […] 1.4% of taxpayers, those who earn more than R500 000 a year, account for 61% of personal tax received [by the government]. So how can you tax them still more?
“You’ve got three times as many people receiving social grants, for doing nothing, as the [total] number of people paying tax. So how can you actually penalise personal tax still more?”
Jammine, whose keynote address focused on the role of pension funds in economic development, and the promotion of social and economic equality, said no matter how much money pension funds were currently generating, “you are not seeing commensurate economic development”.
Among the reasons for this were: poor education and skills development outcomes; tense industrial relations and strikes; concerns about electricity outages; xenophobic violence, poor municipal service delivery and ongoing protests; poor leadership at many parastatals; government “vacillating” on economic policy; perceptions of rising corruption; and a perception that government saw the private sector as the “enemy”.
Jammine said private sector pension fund assets totalled R908-billion last year, while public (government) pension fund assets were just under R1.7-trillion. Together they totalled more than R2.6-trillion, or 68.5% of GDP.
Net cash flow of public pension funds in 2014 was R70-billion, and R68-billion for private funds.
These assets had grown since 1990 at an average annual growth rate (after inflation) of 7.7%.
“Of concern is that it’s really only those who manage to get formal sector employment who are actually part of this crowd […] who can actually benefit from rising pension assets.
“One of the challenges we face, and for that matter the world faces, is how do we transfer the facility of pensions to the broad majority of the population, especially in South Africa where there is such a high level of unemployment, and where so many people are employed in the informal sector?”
Private sector employment in South Africa was “stagnant”, but employment in the government sector was rising.
“So one of the big challenges we have in order to provide more and more pension for development in the future is how to create formal sector employment.”
Of particular concern was that growth in formal sector employment remained at 1% to 1.5% below GDP growth. This went to the heart of the problem.
“If you do not create enough formal sector jobs, you do not generate pensions, and, conversely, if you can’t generate the pension money that is needed for development, if you say government must provide national social security for all, where is it going to get that money?
“The economy is just not producing formal sector jobs commensurate with the amount of growth that is taking place in the economy.”
While the unemployment rate among black South Africans was 29.7% in the first quarter of this year, unemployment among their white compatriots was a low 7.2%.
The main reason for this was education and training levels. A total of 54.8% of black South Africans did not have matric, and only 15.8% had a tertiary education, compared to 46.3% of whites.
Focusing on the huge inequalities that persist in South Africa, Jammine said only 40% of black households earned more than R2 500 a month.
Further, two-thirds of all spending in the country was by people earning more than R12 000 a month.
“Eighty-five percent of the population earns so little that it only accounts for 15% of all expenditure; and, 15% of the population accounts for 85% of all expenditure, and the bulk of pensions earned in the country.”
There were nine million formal sector jobs out of a population of 55 million.
“One of the huge problems South Africa faces, and it is a problem in the rest of the world [too], is the growing gap between the incomes of the rich, executive class and the incomes of the workers.
“This is translating into more and more pressure on the part of trade unions to grab as much as they can, because they see what the executives are earning.”
Jammine said executive remuneration in South Africa continued to “ratchet” up.
Asked to comment on the wealth tax proposal, IRFA president Zamani Letjane said this might make sense if it applied only to growth on investments.
He also noted that a reduction in personal income tax would “allow people to invest a little bit more”.
In a PowerPoint presentation accompanying his address, copies of which were made available, Jammine said his wealth tax proposal was “a better idea than capping executive remuneration, suggested by the New Growth Path and others”.
South Africa’s “asset base” of R16-trillion comprised R12-trillion in financial assets and R4-trillion in property.
Levying a 0.5% tax on net assets might be more acceptable than higher income taxes. Further, “it could serve as a basis for critical economic dialogue to prevent social unrest”.
The document also suggests it could “stave off an implosion of capitalism worldwide and [a] populist revolution in South Africa”.
Among the challenges to implementing a wealth tax were that government might abuse it; there was a risk of it causing a downturn in the financial markets; it was reliant on an honest declaration of assets, and it “will be opposed by vested interests”.