Piketty's wealth tax call 'three years too late'
20 October 2015
Posted by: Author: Fin24
Does South Africa need a new wealth tax on the affluent, as proposed by French economist, academic and author Thomas Piketty?
READ: Piketty suggests wealth tax for SA
Despite the hype created around the topic by the world-renowned Frenchman's visit to South Africa, the country in fact already has a "wealth tax” in the form of capital gains tax, estate duty and donations tax.
Deloitte Africa head of tax Nazrien Kader points out that achieving higher levels of income equality will mean a continued tax burden on the wealthy. While there are no right or wrong answers, Piketty’s call for a wealth tax is "probably three years too late in South Africa”.
A direct way to increase taxes is to increase the top marginal rate – and this happened in SA in February when the top marginal rate was lifted to 41%. "There are, however, concerns as to how effective this is in raising additional tax revenue,” said Kader.
She believes the best way to increase tax revenue, improve wealth transfer to the poor and reduce the burden of taxation on the small number of taxpayers in South Africa is to broaden the tax base. As pre-tax income inequality increases, the role of tax policy becomes even more important.
The mini budget was used as an important platform a year ago to prepare society for higher tax rates and suggested that higher-income earners could pay higher taxes, come March 1 2015. This is indeed what happened, said Kader. "It is likely we will get an update now on whether further increases in wealth taxes can be expected next year.”
South Africa has about 2 900 high net worth individuals (people whose annual gross income is R7m or more and/or whose gross wealth is R75m or more).
"It is increasingly important that all of the high net worth taxpayers pay their fair share. But it is equally important to remember that personal income tax already represents about 34% of total tax revenue compared with 24% for OECD (the Organisation for Economic Cooperation and Development) members. One has to take cognisance of the burden this group of taxpayers already bear,” said Kader.
Existing programmes of wealth redistribution appear to be working well. More than 3.5 million South Africans have been lifted out of poverty through fiscal policy, which taxes the richer in society and redirects resources to raise the income of the poor through social spending programmes, according to a World Bank Group report in November last year.
The report shows that the poorest in South Africa benefit from social spending programmes. About 70% of outlays on social grants and 54% of spending on education and health go to the poorest half of the population in South Africa.
Cash grants and free basic services lift the incomes of some 3.6 million individuals above $2.50 a day. The rate of extreme poverty, measured as the share of the population living on $1.25 per day or less, is cut by half from 34.4% to 16.5%. The child support grant and old age pension make the largest impact on poverty.
"By taxing the income of the rich proportionally more than the poor and using social spending to boost the incomes of the poorest more than tenfold, fiscal policy is narrowing the income gap.
"It is clear jobs, education and economic growth are needed to truly lift people out of poverty and thereby broaden the tax base - rather than simply looking for more ways to transfer wealth via the tax system. Fiscal policy can play such a key role in helping stimulate the economy and demarcating between growth and poverty if managed well,” said Kader.
This article first appeared on fin24.com.