Davis Tax Commission (DTC) head Judge Dennis Davis has confirmed that the commission would be investigating a possible wealth tax for South Africa, but indicated that the process to design such a tax would take time and that its immediate focus was on other instruments, such as estate duties.

The issue of a wealth tax had come to the fore following the African National Congress’s recent national general council, where it was resolved that consideration should be given to an “appropriately structured wealth tax to raise revenues for investment in skills, infrastructure and the economic development priorities identified”.

The resolution followed a recent visit to South Africa by French economist Thomas Piketty who argued that the introduction of a yearly progressive wealth tax, even at a low rate, would improve transparency about income and wealth dynamics and arm domestic policymakers with the information required to formulate strategies for addressing the country’s “disturbingly high” levels of inequality.

Addressing the fourth yearly International Economic Law Update conference held at the University of the Witwatersrand, Davis said a wealth tax would indeed be considered.

“We are going to investigate a wealth tax, that I can assure you. But I’m not one who believes you can just design a wealth tax, or any other tax, on the back of a cigarette box, shove it out into the public domain and then pray it will be okay. So that’s going to take some time.”

The tax system alone could also not solve the country’s serious inequality problem, which had worsened since democracy to a point where the top 1% of earners were absorbing 20% of income – a level that was close to the 22% share of 1948, but worse than the 10% share recorded between 1975 and 1991.

“The truth about it is that we’ve done appallingly in relation to questions of inequality and . . . it is, therefore, understandable that something’s got to be done about inequality.”

NO TIME FOR ‘TRUSTAFARIANS’

The DTC was making proposals about changing the estate-duty architecture, which Davis suggested could help raise additional revenues in a context where there were serious downsides to using the other instruments, such as raising personal or corporate taxes, or the value added tax (VAT) rate.

Quipping that he did not “have time for trustafarians”, Davis acknowledged that it would be important to debate the estate-duty thresholds. “[But] what I am simply saying is that, over a certain limit . . .why should there not be a proper estate duty? Why should there be an accumulation of wealth that goes to beneficiaries over a certain amount and people shouldn’t pay?”

By contrast, the DTC was not recommending an increase to the VAT rate, asserting that such an increase was out of line with two of the DTC’s three guiding principles of legitimacy, which demanded a progressive tax structure, and encouraging economic growth.

It would be supportive of the third, however, which related to delivering sufficient revenue to support government’s capital investment plans and the social wage. A 1% increase in the VAT rate would deliver yearly revenues of between R15-billion and R20-billion, while increasing the personal income-tax rate on those earning R1-million or more from 41% to 45%, government would raise only between R3-billion and R5-billion.

“But [increasing VAT] has retrogressive consequences, because it affects poorer people more that it does richer people and it is has a retarding effect on the economy – for every per cent increase in VAT, there is a 0.2% to 0.3% reduction in gross domestic product in the short run.”

The commission was also cautious on raising the corporate tax rate, not only because it could lower the country’s competitiveness and growth prospects, but also because there was still a material gap between the nominal tax rate of 28% and the effective rate paid by companies.

“What’s the point of shoving up the 28%; until you actually have [greater] congruence between your effective and nominal rate it seems to be an exercise in completely self-defeating rhetoric.”

BASE EROSION & NONDISCLOSURE

Therefore, the current focus of the DTC was on estate duties, base erosion and profit shifting, especially the contentious issue of transfer pricing, capital gains tax and cracking down on nondisclosure.

Davis asserted that, notwithstanding recent amnesties for those who had breached South Africa’s tax laws, there was arguably still “an astonishing sum of money washing around that does not attract tax, because there is nondisclosure”.

From 2017, there would be international disclose from banks to revenue services, “so we are thinking very seriously of how we actually capture significant sums there – and there is a lot of money there”.

The previous amnesty netted R7-billion and Davis believed there was yet more to be collected. “We are sending the Minister a series of recommendations in regard thereto. My view is, people are either going to have to pay up, or frankly we should prosecute them, because it’s criminal activity.”

TAX REVOLT WARNING

However, Davis also cautioned that efforts were required on the expenditure end of the fiscal balance to ensure that the South African tax system remained credible and to avoid a “tax revolt”.

“My job is on the revenue side, not the expenditure side. So, unfortunately, I’m not a commission of inquiry into corruption. But I want to say immediately that, the greater the level of corruption in our country, the less we will have tax integrity and the greater the possibility of a tax revolt.”

He said that, in interactions with citizens from all walks of like, more and more people were questioning why they should pay tax in the context of such high levels of corruption.

Secondly, government could not focus on revenue collection and deficits without dealing with government expenditure. For instance, it was apparent ahead of the public sector wage talks that any increase above 6% would increase the deficit and wipe out reserves.

Ultimately, though, the settlement would result in additional costs of 10.1% this year and increases that would be at least two percentage points higher than inflation in the subsequent two years. The 2015 wage agreement had led to a Budget shortfall of R12.2-billion in the current fiscal year, R20.6-billion in 2016/17 and R31.1-billion in 2017/18.

“A country in our parlous economic position cannot afford to have wage increases of 11% year in and year out. Because if you do, how are you going to fund your universities, your schools and the various other forms of capital infrastructure? The simple answer is that you can’t.”