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A tax on surplus means

26th August 2016

By: Riaan de Lange

  

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People always say, ‘The pure and simple truth of the matter is . . .’ But the [whole] truth is rarely pure and never simple.” I was reminded of these immortal words by Oscar Wilde when I read an article on the imposition of a wealth tax, a topic of debate that continues to linger, simply refusing to die.

At face value, a wealth tax seems to have unquestionable social merits. It is seemingly the right thing to do. But is it? Its premise is that wealth (defined as a surplus of means) that is in the possession of the so-called ‘wealthy’ should be shared with or redistributed (transferred) to the less fortunate, even if only in part. But the argument for a wealth tax tends to be motivated by what is considered its envisaged dual accomplishments: poverty reduction and unemployment eradication. This implies that these desired outcomes can be achieved simply by redistributing wealth by means of the social mechanism of taxation. This, of course, conveniently ignores the fact that such monetary transfers do not result in, or ensure, sustainability; they tend to be a one-off redistribution. So, a wealth tax tends to simply penalise the possession of ‘wealth’ and to compensate the ‘poor’. It has no regard for why there are those considered, or classified as, ‘poor’. Is the general assumption that those who are ‘poor’ find themselves in this situation because they are being deprived of opportunity and not because of their own lack of desire or valued contribution?

The recent attempt at the resurrection of the debate on a wealth tax comes from an August 11 Fin24 article, ‘How SA can use wealth tax to cut poverty, unemployment’, which argues: “A ‘wealth tax’ in South Africa could significantly address two of South Africa’s triple challenges of joblessness, poverty and inequality – provided it is managed by competent individuals and institutions . . . Only quality education can address inequality in our society in a sustainable way, while a focused, well- formulated use of ‘tax’ proceeds could address a few percentage points of South Africa’s 36% unemployment rate and start reducing poverty for many fellow South Africans living on the edge.”

The call for the imposition of a wealth tax is reminiscent of the mantra of Robin Hood – “Take from the rich. Give to the poor.” Were there any lasting benefits to Hood’s practice or did it simply require continuous monetary replenishment?

A wealth tax – also known as a capital tax, an equity tax or a net worth tax – is essentially a levy on the total value of personal (individual) assets. It sounds quite simple and justifiable, but is it really that simple?

Let us consider the term ‘wealth tax’, which is supposedly understood by all concerned. Surely, we all know what ‘wealth’ is? But do we? When you search for ‘wealth’ on Goggle, a raft of synonyms come up, such as ‘affluence’, ‘prosperity’, ‘opulence’, ‘riches’, ‘means’, ‘substance’, ‘luxury’, ‘wellbeing’ and ‘plenty’. The definitions on offer include ‘an abundance of valuable possessions or money’ and ‘a plentiful supply of a particularly desirable thing’. Investopedia.com offers this definition: “Wealth measures the value of all the assets of worth owned.”

Also consider that wealth is based on comparison. Assuming, for a moment, that all people in the world are millionaires, will they all then, by definition, be wealthy?

As for ‘tax’, a simple Google definition offers it as a compulsory contribution to state revenue, levied by government on workers’ income, assets and profits. There is little contention as to what a tax constitutes, which is not the case with wealth. The challenge with wealth is that it needs to be qualified and quantified.

Although I despise this means of classification – well, I despise any form of classification and segregation – there is a hierarchy of three socioeconomic classes, namely upper class, middle class and working class. Interestingly, the unemployed also fall within the working class – talk about a contradiction in terms.

It is a fact that the bulk of the tax burden is carried by the middle class and one would expect South Africa to be no different in this respect. ‘How much money you need to be middle class in South Africa’, the title of a February 3 article published on http://businesstech.co.za, is quite relevant. The writer of the article believes that South Africa has a fraction more than 4.3-million middle-class citizens, according to Credit Suisse’s criteria. So, how wealthy are those in this class? The middle class is identified in this article as a household of four persons with a total income of between R5 600 and R40 000 a month after direct income tax. This could hardly be considered wealthy by any stretch of the imagination.

Returning to the Fin24 article – it suggests that individuals or companies that “gained during apartheid” and with a proven record that they can create their own wealth or manage the wealth that they have inherited should be asked to pay 2%, 5% or 10%.

This worsens the complication instead of providing clarity on determining this so-called wealth. An obvious question would be: Who will determine the extent of the ‘wealth’ that was gained during apartheid? Also, does this imply that wealth attained after the demise of apartheid should be exempt from a wealth tax? If it is exempt, will ‘wealth tax’ then be a true description of this intended tax? A wealth tax, by definition, should apply to the wealthy – otherwise, it is not a wealth tax.

Then there is the assumption that wealth is ‘liquid’ – that is, in the form of cash. But what if the wealthy do not have their wealth in cash form? Does it mean that, if a wealth tax is imposed, the assets of those who are rich should be sold for tax obligations to be honoured? In whose interest would this be? Who would want to acquire the disposed assets, and would the sellers receive fair value for the assets? Quite simply, what would be the justification for the imposition of a ‘wealth tax’?

All this reminds me of an extract from The New Colossus, a sonnet by American poet Emma Lazarus, who wrote it in 1883 to raise money for the construction of the pedestal of the Statue of Liberty. The poem was in 1903 engraved on a bronze plaque and mounted inside the Statue of Liberty’s pedestal. It goes like this: “Give me your tired, your poor, Your huddled masses yearning to breathe free, The wretched refuse of your teeming shore. Send these, the homeless, tempest-tost to me, I lift my lamp beside the golden door!”

It is access to opportunity, not redistribution by means of a tax, that improves people’s lives.

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor

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