The consequences of the Covid-19 lockdown are yet to be fully determined and understood. But one thing we can be fairly certain of – in South Africa its impact will be shaped by the country’s inequalities.
Our study reveals that half of the adult population survives with near-zero savings, while 3,500 individuals own 15% of the country’s wealth. The response to the crisis must take this into account to help the most vulnerable while still safeguarding fiscal sustainability.
Based on our new study on wealth inequality in SA, we propose a progressive solidarity wealth tax. This would allocate the fiscal burden of current interventions on those most capable of paying. It is in line with the recommendations recently made by the IMF to equitably attain fiscal sustainability and better position the economy for post-Covid-19 recovery.
We show that a wealth tax on the richest 354,000 individuals could raise at least R143bn. That equates to 29% of the announced R500bn fiscal cost of the relief package.
Many studies show how extreme income inequality is in South Africa, but little has been documented about wealth. Better data is needed – about direct ownership, capital income and assets held through trusts. Nevertheless, our results give a good sense of the magnitude of the disparities. Three key results are worth mentioning.
Firstly, in 2017, the 10% richest South Africans owned 86% of wealth, with an average of R2.8m per adult. In contrast, about 18 million were either in debt or had near-zero savings. With an average net worth of R486m, the richest 3,500 owned more than the 32 million poorest combined.
Secondly, these extreme inequalities extended to all forms of assets. The richest 10% owned 99.8% of bonds and stocks, which accounted for 35% of wealth. The top decile also owned 60% of housing wealth and 64% of pension assets. Housing wealth amounted to 29% of wealth and pension assets to 33%.
Thirdly, we show that wealth concentration has remained broadly stable since 1993, and may even have increased within top wealth groups. Wealth inequality remains significantly higher than what could be estimated in Russia, China, India, the US or France.
Our findings are particularly relevant to the current crisis. South Africans are unequally armed to survive the contraction of the economy produced by the lockdown.
Before lockdown, about half the population was already in debt, or had near-zero net wealth. This crisis will at best sink millions of people further into debt or force them to beg, loot or starve. Conversely, a minority of individuals are in a much less vulnerable situation.
The policy solutions needed to absorb the shock and recover fast must be carefully designed to take these factors into account. Principally, they need to reallocate resources to give everybody an equal chance to survive the shock.
In this unprecedented crisis, the government announced a relief package with a R500bn fiscal cost. One key remaining question is how such a plan will be funded.
The possibility of collecting additional tax revenue from those most able to contribute has not yet been brought to the table. We believe it should be considered. It would allow the country to allocate the cost of the national response to the least vulnerable.
In the spirit of solidarity, a wealth tax could be part of the solution to safeguard long-term fiscal sustainability and inclusive growth.
We propose a progressive wealth tax, which would apply only to South Africans with a net wealth currently superior to R3.6m, that is, the richest 354,000 (1% of the adult population).
The first bracket – all wealth between R3.6m and R27m – would be taxed at a 3% rate, the second bracket (R27m to R119m) at 5%, and all wealth above R119m at 7%. Individuals with less than R3.6m would be exempt. A billionaire would face a 6.7% tax rate: she would pay 3% on the fraction of her wealth higher than R3.6m but lower than R27m; 5% on wealth higher than R27m but lower than R119m; and 7% of the R821m she owns above R119m. This would leave her with post-tax wealth of R933m.
Taking into account the recent JSE All-Share Index drop in value and assuming a 30% evasion rate (as available evidence suggests), we simulate that such tax would raise R143bn.
It would still leave rich individuals with very high levels of wealth: for each of the brackets, post-tax wealth would on average be R9.3m, R50m and R376m respectively.
Critics of a wealth tax argue it would be too costly and complex to implement. But SA is well positioned to administer this tax cost-effectively. Firstly, the tax base we consider covers very few individuals, reducing the administration required.
Secondly, SA already has in place third-party reporting by financial intermediaries straight into the South African Revenue Service, providing information on capital income and ownership. Existing municipal valuations could be used to value property assets.
Capital flight, through offshoring or migration, is a potential risk. We account for this by making conservative assumptions about avoidance and evasion, and still project sizeable revenues. There is also markedly more co-operation between tax authorities to clamp down on undeclared incomes and assets in foreign jurisdictions, including tax havens.
In light of the lessons learned from the Zondo commission of inquiry into corruption, taxpayers would need guarantees that this special tax will be properly collected and spent. National treasury already uses ringfencing mechanisms to make revenue and spending for specific projects accountable. The government could build on such rules to generalise more transparent practices.
There may be theoretical implementation challenges of such a wealth tax. But we would argue that SA is well placed to overcome these.
Aroop Chatterjee is a research manager of wealth inequality at the Southern Centre for Inequality Studies, University of the Witwatersrand; Amory Gethin is a research fellow at the Paris School of Economics' World Inequality Lab; and Léo Czajka is a research fellow at the UCLouvain's World Inequality Lab
Time to put wealth tax on the table
Image: 123RF/LEONARD ZHUKOVSKY
The consequences of the Covid-19 lockdown are yet to be fully determined and understood. But one thing we can be fairly certain of – in South Africa its impact will be shaped by the country’s inequalities.
Our study reveals that half of the adult population survives with near-zero savings, while 3,500 individuals own 15% of the country’s wealth. The response to the crisis must take this into account to help the most vulnerable while still safeguarding fiscal sustainability.
Based on our new study on wealth inequality in SA, we propose a progressive solidarity wealth tax. This would allocate the fiscal burden of current interventions on those most capable of paying. It is in line with the recommendations recently made by the IMF to equitably attain fiscal sustainability and better position the economy for post-Covid-19 recovery.
We show that a wealth tax on the richest 354,000 individuals could raise at least R143bn. That equates to 29% of the announced R500bn fiscal cost of the relief package.
Many studies show how extreme income inequality is in South Africa, but little has been documented about wealth. Better data is needed – about direct ownership, capital income and assets held through trusts. Nevertheless, our results give a good sense of the magnitude of the disparities. Three key results are worth mentioning.
Firstly, in 2017, the 10% richest South Africans owned 86% of wealth, with an average of R2.8m per adult. In contrast, about 18 million were either in debt or had near-zero savings. With an average net worth of R486m, the richest 3,500 owned more than the 32 million poorest combined.
Secondly, these extreme inequalities extended to all forms of assets. The richest 10% owned 99.8% of bonds and stocks, which accounted for 35% of wealth. The top decile also owned 60% of housing wealth and 64% of pension assets. Housing wealth amounted to 29% of wealth and pension assets to 33%.
Thirdly, we show that wealth concentration has remained broadly stable since 1993, and may even have increased within top wealth groups. Wealth inequality remains significantly higher than what could be estimated in Russia, China, India, the US or France.
Our findings are particularly relevant to the current crisis. South Africans are unequally armed to survive the contraction of the economy produced by the lockdown.
Before lockdown, about half the population was already in debt, or had near-zero net wealth. This crisis will at best sink millions of people further into debt or force them to beg, loot or starve. Conversely, a minority of individuals are in a much less vulnerable situation.
The policy solutions needed to absorb the shock and recover fast must be carefully designed to take these factors into account. Principally, they need to reallocate resources to give everybody an equal chance to survive the shock.
In this unprecedented crisis, the government announced a relief package with a R500bn fiscal cost. One key remaining question is how such a plan will be funded.
The possibility of collecting additional tax revenue from those most able to contribute has not yet been brought to the table. We believe it should be considered. It would allow the country to allocate the cost of the national response to the least vulnerable.
In the spirit of solidarity, a wealth tax could be part of the solution to safeguard long-term fiscal sustainability and inclusive growth.
We propose a progressive wealth tax, which would apply only to South Africans with a net wealth currently superior to R3.6m, that is, the richest 354,000 (1% of the adult population).
The first bracket – all wealth between R3.6m and R27m – would be taxed at a 3% rate, the second bracket (R27m to R119m) at 5%, and all wealth above R119m at 7%. Individuals with less than R3.6m would be exempt. A billionaire would face a 6.7% tax rate: she would pay 3% on the fraction of her wealth higher than R3.6m but lower than R27m; 5% on wealth higher than R27m but lower than R119m; and 7% of the R821m she owns above R119m. This would leave her with post-tax wealth of R933m.
Taking into account the recent JSE All-Share Index drop in value and assuming a 30% evasion rate (as available evidence suggests), we simulate that such tax would raise R143bn.
It would still leave rich individuals with very high levels of wealth: for each of the brackets, post-tax wealth would on average be R9.3m, R50m and R376m respectively.
Critics of a wealth tax argue it would be too costly and complex to implement. But SA is well positioned to administer this tax cost-effectively. Firstly, the tax base we consider covers very few individuals, reducing the administration required.
Secondly, SA already has in place third-party reporting by financial intermediaries straight into the South African Revenue Service, providing information on capital income and ownership. Existing municipal valuations could be used to value property assets.
Capital flight, through offshoring or migration, is a potential risk. We account for this by making conservative assumptions about avoidance and evasion, and still project sizeable revenues. There is also markedly more co-operation between tax authorities to clamp down on undeclared incomes and assets in foreign jurisdictions, including tax havens.
In light of the lessons learned from the Zondo commission of inquiry into corruption, taxpayers would need guarantees that this special tax will be properly collected and spent. National treasury already uses ringfencing mechanisms to make revenue and spending for specific projects accountable. The government could build on such rules to generalise more transparent practices.
There may be theoretical implementation challenges of such a wealth tax. But we would argue that SA is well placed to overcome these.
Aroop Chatterjee is a research manager of wealth inequality at the Southern Centre for Inequality Studies, University of the Witwatersrand; Amory Gethin is a research fellow at the Paris School of Economics' World Inequality Lab; and Léo Czajka is a research fellow at the UCLouvain's World Inequality Lab
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