27four Investment Managers
22nd June 2017
A wealth tax smacks of hypocrisy
The Davis Tax Committee’s call for public comment on the introduction of a potential wealth tax in South Africa closed at the end of May. We can now expect public hearings to take place on the matter. Notwithstanding what sceptics would regard as a hidden agenda behind the re-emergence of government’s clamour for a wealth tax, there is merit in the need to revisit this issue.
For a country experiencing a widening chasm between the rich and poor, the introduction of a potential wealth tax is a crucial subject; it is a fundamental question that goes to the heart of narrowing the economic gap and giving hope to everyone. This is particularly critical for a country like South Africa where such a tax would be easily explained as a mechanism aimed at redressing the legacies of apartheid. As such a wealth tax would not only be ethical but also morally defensible.
Advocates of taxing the wealthy are emboldened by examples of economies such as Switzerland which has implemented what has turned out to be a success story. The Swiss model is relatively simple; an annual tax is imposed on the value of all residents’ assets. Likewise, non-residents pay a tax on their assets derived from business enterprises and their real assets that are situated in the country.
Much as each country has its own history and the fact that each economy is linked to such history, it is reasonable to argue that such an approach would arguably have an effect of softening the tax blow; it would serve to de-stigmatise the notion that a wealth tax is a form of punishment. It recognises that wealth is not a crime, it acknowledges that in fact, in most cases wealth is a result of initiative, creativity and hard work.
The problem with states that have sought to implement the tax is that they have tended to premise their talk more from a political rather than an economic context. The politicisation of the issue – for political survival in the face of a crumbling support base – has a negative effect, a perception of envy on the part of the less wealthy, and engenders “requisitional socialism”. It mars what would ordinarily be good intents behind the levy. It taints backers as communalist parasites who are bent on annihilating the super-rich. As such, the whole debate is trivialised, it loses objectivity and is instead reduced to racial class warfare.
The fact that such rhetoric only emerges as elections draw nigh only serves to aggravate the notion that government does not appreciate the gravity of economic inequality. That has far-reaching spill-over consequences. In most cases it has created fertile ground upon which populistic political and social groupings have managed to hijack the issue with their brand of radical economic transformation.
The fear that such a populistic agenda might awaken the middle and lower classes from their slumber summons the attention of the super-rich. It gets them scared. To counter that, they unleash their own propaganda machine which sells the idea that a wealth tax is ill-conceived. When everything else fails, resort to a more efficient tool; corrupting those in authority.
Interesting counterarguments have emerged. The electioneering debate reached its crescendo after Thomas Piketty’s visit and publication of his best-selling book. It is argued that imposing a wealth tax would make wealth creators leave the country. However, it can be argued that there is no correlation between being the super-rich and the creation of businesses and jobs; wealthy people and wealth creators are not necessary the same people. It is also averred that in a democracy like ours, a wealth tax would be a violation of the Constitution’s mission to protect life, liberty and the property of the citizens.
It is also argued that when the government’s clarion call has been the need to generate jobs and wealth, a wealth tax smacks of hypocrisy and is in fact a contradiction. It entails taxing people retrospectively and the creation of new wealth by expropriating “old wealth” by taxation. By contrast, the social market economy sentiment is of the view that the super-rich have diverse mechanisms of avoiding tax and at worse, they loot the populace, evade paying tax and then export their riches to tax havens. As such, since the wealthy can exploit the system to avoid tax, new ways of taxation for the government to get its fair share have to be explored. By contrast, it is stated that the government is pontificating this tax because it has plundered the national Treasury and a wealth tax is one way of plugging the deficit.
All those, and a plethora of other views, need to be debated. It is good that discourse through platforms such as the Davis Tax Committee is on course. It is hoped that such discourse will explore the impact of such a tax on the government’s economic agenda.
So far, and sadly, not many success stories of wealth tax can be proffered; the strategy has largely been a disaster in many economies where it has been tried. However, whatever side one is on, the reality is that there is a need to broaden ownership of capital to ensure broad-based prosperity. This can be achieved by pragmatic strategies that are aimed at maximising tax revenue. That might entail tackling debt head on and minimising extravagant spending. Imposing a wealth tax in a bid to stimulate prosperity should be the last resort.