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

These are unprecedented times, and the role of media to tell and record the story of South Africa as it develops is more important than ever.

The Mail & Guardian is a proud news publisher with roots stretching back 35 years, and we’ve survived right from day one thanks to the support of readers who value fiercely independent journalism that is beholden to no-one. To help us continue for another 35 future years with the same proud values, please consider taking out a subscription.

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

A colossus with feet of clay

South Africa is disproportionately targeted by cybercriminals. Digital attacks call for digital solutions and technology is a the prime weapon in this fight

Journey through anxious Joburg

A new book has collected writing about the condition of living, yes, with a high crime rate, but also other, more pervasive existential urban stresses particular to the Global South

China’s resource-for-infrastructure deals

Are RFIs a viable model for aiding Africa’s economic development?

Football legend Maradona dies

The Argentinian icon died at his home on Wednesday, two weeks after having surgery on a blood clot in his brain

Covid vaccines: Hope balanced with caution

As Covid vaccines near the manufacturing stage, a look at two polio vaccines provides valuable historical insights

Under cover of Covid, Uganda targets LGBTQ+ shelter

Pandemic rules were used to justify a violent raid on a homeless shelter in Uganda, but a group of victims is pursuing a criminal case against the perpetrators

Subscribers only

Covid-19 surges in the Eastern Cape

With people queuing for services, no water, lax enforcement of mask rules and plenty of partying, the virus is flourishing once again, and a quarter of the growth is in the Eastern Cape

Ace prepares ANC branches for battle

ANC secretary general Ace Magashule is ignoring party policy on corruption-charged officials and taking his battle to branch level, where his ‘slate capture’ strategy is expected to leave Ramaphosa on the ropes

More top stories

CR17 report is not perfect, but the investigation was rational,...

So says public protector Busisiwe Mkwhebane’s lawyer, who said she had reason to suspect the money was being laundered through the campaign

‘We struggle for water, but power stations and coal mines...

A proposed pipeline will bring water polluted with Gauteng’s sewage to the Waterberg in Limpopo to boost the coal industry during the climate crisis

Journey through anxious Joburg

A new book has collected writing about the condition of living, yes, with a high crime rate, but also other, more pervasive existential urban stresses particular to the Global South

Football legend Maradona dies

The Argentinian icon died at his home on Wednesday, two weeks after having surgery on a blood clot in his brain

press releases

Loading latest Press Releases…