"Confidence is what you have before you understand the problem" is a catchy phrase attributed to Woody Allen. It’s also the way that Iraj Abedian, CEO of Pan-African Capital, thinks about the catchy concept of a wealth tax, which has been touted as a way to raise a war chest to fight Covid-19.
"It sounds so simple, but that’s deceptive. We don’t even have agreement on how to define wealth, never mind how to practically tax such a malleable concept. To talk about instituting such a complex tax now, in the middle of this crisis, just won’t work," says Abedian.
It’s an apposite debate since a group of economists, led by Michael Sachs, the Wits University professor and former National Treasury official, submitted a proposal to the government about a one-time levy on SA’s richest individuals, which many are depicting as a wealth tax.
This week, Sachs told the FM it would be important, even symbolically, to find some way for the affluent to contribute to mitigating SA’s coronavirus-induced cash crunch through the tax system. "The concept would be that of a solidarity levy — a once-off contribution to the tax system. It’s not necessarily a wealth tax, even though it might target the wealthy. It could be a temporary increase in the top marginal rate for income above a certain amount," he says. That’s a critical distinction to make, given all the problems of implementing a wealth tax.
In 2014, the idea caught alight after French economist Thomas Piketty published Capital in the Twenty-First Century, in which he called for a graduated wealth tax to curb inequality. Anyone with a fortune of between €1m and €5m, say, would pay an annual tax equal to 1% of that amount.
The idea has popular support too. In the US, a country forged through uncompromising capitalism, 66% of those polled by Ipsos agree that the very rich "should contribute an extra share of their total wealth each year" to public programmes.
A tax that brings in less than R10bn won’t touch sides on the stimulus plan some want
In June 2019, 18 super-wealthy Americans wrote an open letter lobbying for a tax on the richest 75,000 Americans of 2% of any fortune above $50m. The writers included George Soros, Facebook co-founder Chris Hughes and Molly Munger, the daughter of Berkshire Hathaway’s Charlie Munger. "A wealth tax could help address the climate crisis, improve the economy, improve health outcomes, fairly create opportunity, and strengthen democratic freedoms," they wrote.
Only, it would be a nightmare to administer. That’s why, of the 12 European countries that had a wealth tax in 1990, only four still do — Spain, Norway, Switzerland and Belgium.
Lumkile Mondi, a Wits University economics lecturer, tells the FM that a wealth tax would surely fail in SA. "Individual assets are often held in the form of a trust or a company. So, with the SA Revenue Service having been hollowed out, [it] is a pipe dream. The cost of implementing such a tax would outstrip the revenue collected," he says.
This is why Sachs’s concept is smarter, as it focuses on income, which is easier to measure than wealth. Sachs, however, says there are crucial caveats. "It’s an important idea to put on the table, but beyond that, nobody has a clear plan on how to design such a levy. And besides, it might not raise much revenue," he says.
In fact, a wealth tax is unlikely to do very much at all right now, says judge Dennis Davis, head of the tax committee tasked by the government to explore ways to reform the tax system. In a March 2018 report, Davis’s committee said a wealth tax couldn’t be implemented soon, partly because "the quality of existing data with respect to wealth would have to be significantly improved".
Nor would it be as simple as it sounds. Would your pension savings be included in your total wealth, and hence make you liable for a wealth tax? And if so, would you have to sell your house, say, to pay that liability?
This week, Davis told the FM a wealth tax isn’t the answer to Covid-19. "The point is, first, how do implement it, and second, how much would it bring in? Given our pyramid income structure, we’d be lucky to raise more than R5bn, or R10bn if you had a higher rate," he says.
If you’re looking to raise funding for Covid-19 through a one-off tax, he says, it’s better to focus on income.
"You could increase the income tax from 45% to 47% for those earning more than R1m, impose a tax of 50% on those earning more than R2m, and 53% on those earning more than R2.5m," he says. It’s a compelling argument, since a wealth tax that brings in less than R10bn won’t touch sides on the R500bn stimulus package.
There’s another issue too. In recent weeks, many of SA’s richest — including Johann Rupert, the Oppenheimer family and Patrice Motsepe — have donated vast sums to thwart the impact of Covid-19. Equally, executives at such companies as FirstRand, Vodacom, Nedbank, Absa and Standard Bank donated 30% of their salaries.
Slapping an extra tax on them now may have adverse consequences — rather than donating, the ultra-wealthy might just wait until the money is extracted. And many would rather put their money directly into Covid-19 emergency funds, rather than deliver it to a government that hasn’t got a great record of using tax efficiently — think SAA, for example.
It’s a nice idea, but at this point grasping for a wealth tax as a miracle remedy feels a lot like the myriad other "cures" being trotted out for Covid-19.
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