Get more Mail & Guardian
Subscribe or Login

Is a wealth tax the answer?

As countries across Africa face tough economic climates and revenue shortfalls in the wake of Covid-19, questions are being raised as to whether governments should increase taxes on the wealthy as a way to close budget deficits. 

In South Africa, a lockdown period came into effect at the end of March and shortly thereafter, a R500-billion stimulus package was announced. With high levels of debt in the country, the question is: where will the additional funding come from?

There is no doubt that South Africa’s government, as with others on the continent, will have to source funding to support its relief efforts.

In South Africa, where 90% of wealth is held by 10% of the population, the debate around a wealth tax rages on in the country. 

When will it come into place, how will it work and who will be taxed?

This conversation is not new. 

In 1994, the Katz commission indicated, based on research conducted, that an annual net wealth tax would be too costly in relation to the additional tax revenues to be collected. The feedback was that the then Receiver of Revenue (now South African Revenue Service or Sars) should first put a proficient income tax collection system in place, and only then could an annual wealth tax be considered.

Many years later, the Davis Tax Committee (DTC), led by Judge Dennis Davis and tasked with looking at the South African tax system with reference to global trends, indicated that estate duty would be an effective tax revenue collection system and that Sars should adjust its estate duty systems to become more efficient.

In referencing the role of estate duty and donations tax in South Africa, the DTC referred to a point raised by the Katz commission, which, based on its research in 1994, said that wealth taxes should make up between 1 and 1.5% of the total revenue collected. The second report, released in 2018, spoke to the effectiveness of a net annual wealth tax, reconfirming the wealth inequality in SA but also noting the significant contribution the wealthy have already made to revenue collections.

The four taxes payable predominantly by the wealthy in SA are estate duty, donations tax, capital gains tax and transfer duty.

The DTC stressed that an annual net wealth tax should not be in addition to current wealth taxes, which could lead to double taxation, but rather as an alternative and only if it could be more efficient and effective. It ultimately concluded an annual net wealth tax would not be suitable in South Africa and concluded that Sars should look at focusing on making current mechanisms such as estate duty and donations tax more effective.

If the local revenue authority has accurate data around taxpayers’ wealth and revenue collection shrinks, additional wealth taxes could become a reality in South Africa.

The situation in east Africa

Meanwhile, in east Africa, a wealth tax has not been a key priority for governments and in fact, until recently, capital gains tax (CGT) in Kenya, for example, was reintroduced after an almost three-decade hiatus. It remains to be seen whether the respective governments in the region will turn to a wealth tax after the massive impact of Covid-19 on revenue collections.

The pandemic will have an impact on the distribution of income, with poorer households sharing the brunt, which leads to higher inequality.

From a Kenyan perspective, the approach the government has used to tax the wealthy has been influenced by their investment of choice: real estate. This led to the reintroduction of CGT at a rate of 5%.

The effective CGT rate is 30% in Uganda (for companies and individuals) and the same in Tanzania (for land, oil and mining rights). In Rwanda, there is currently no CGT on the sale of personal property or land unless the assets are in the books of a registered business, which will then be taxed through corporate investment tax.

Essentially, Kenya does have the lowest rate of funds taxed compared to the rest of the east African community. It is likely that in order to improve the government revenues, this rate might be raised to match what we see in the other countries in the region. The same goes for an increase in property taxes, which each country is looking into to bridge the revenue gap caused by the economic distress brought on by the impact of Covid-19.

The views expressed are those of the author and do not reflect the official policy or position of the Mail & Guardian.

Subscribe to the M&G

Thanks for enjoying the Mail & Guardian, we’re proud of our 36 year history, throughout which we have delivered to readers the most important, unbiased stories in South Africa. Good journalism costs, though, and right from our very first edition we’ve relied on reader subscriptions to protect our independence.

Digital subscribers get access to all of our award-winning journalism, including premium features, as well as exclusive events, newsletters, webinars and the cryptic crossword. Click here to find out how to join them.

Melissa Duffy
Melissa Duffy is lead partner for the Family Office and Private Client initiative at KPMG
Aliya Khanbhai
Aliya Khanbhai is wealth and investment head at Stanbic Kenya

Related stories

WELCOME TO YOUR M&G

If you’re reading this, you clearly have great taste

If you haven’t already, you can subscribe to the Mail & Guardian for less than the cost of a cup of coffee a week, and get more great reads.

Already a subscriber? Sign in here

Advertising

Subscribers only

Special Investigating Unit records detail Zweli Mkhize’s role in Digital...

In its court document, the SIU sets out its case against the alleged fraudulent and corrupt relationship between Digital Vibes, Mkhize and the health department — and asks for a tender worth R150-million to be set aside and money paid back

The basic income grant is surely on the horizon

It is becoming clear SA needs a BIG, as many ANC cabinet members, opposition parties and experts agree. But there is still dissent from some quarters

More top stories

Special Investigating Unit records detail Zweli Mkhize’s role in Digital...

In its court document, the SIU sets out its case against the alleged fraudulent and corrupt relationship between Digital Vibes, Mkhize and the health department — and asks for a tender worth R150-million to be set aside and money paid back

South Africa has secured enough Covid-19 vaccines to last until...

Pfizer will deliver 1.5-million doses on Sunday and a further 5.6-million doses by Wednesday and 1.4-million J&J vaccines will arrive by Monday

The basic income grant is surely on the horizon

It is becoming clear SA needs a BIG, as many ANC cabinet members, opposition parties and experts agree. But there is still dissent from some quarters

Bargaining council looks into complaint against Blade Nzimande

Two months before the long-serving higher education director general was suspended, he reported Nzimande to the bargaining council
Advertising

press releases

Loading latest Press Releases…
×