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Piketty’s call for wealth taxes likely to feature in MTBPS, says Deloitte

Johannesburg – 20 October 2015 – Alleviating high levels of income inequality in South Africa is likely to feature strongly when the Medium-Term budget Policy Statement (MTBPS) is released later this week, but government should move to find ways to broaden the tax base rather than simply taxing existing taxpayers more, says Deloitte.

Despite the hype created about the need for a new wealth tax on the affluent following the recent visit to SA by world-renowned French economist, academic and author Thomas Piketty, a “wealth tax” is already in existence in SA in the form of capital gains tax, estate duty, and donations tax.  Evidence is also mounting that the inequality debate needs to focus more strongly on the developed world, where the top 1% of income earners is grabbing the lion’s share of pre-tax income.

During his visit, Piketty urged SA to consider an annual wealth tax or a tax on individual net wealth as SA is one of the most unequal countries in the world.

Head of Tax at Deloitte Africa, Nazrien Kader, says achieving higher levels of income equality will require the burden of tax continuing to fall on the wealthy, and while there are no right or wrong answers, Piketty’s call for a wealth tax is “probably three years’ too late in South Africa”.

She says while it is easy to point fingers at SA, the US as the world’s model of capitalism, has seen average income of the top 10% of earners widen to 19 times higher than the bottom 10%. Wealth inequality is even worse, with the top 10% owning 76% of all net wealth and income poverty affects around 18% of the population.

In a recent report, the Organisation for Economic Co-operation and Development (OECD) says income inequality has risen in most OECD countries in the last three decades. In particular, income inequality in OECD countries is at its highest level for the past half century. The average income of the richest 10% of the population is about nine times that of the poorest 10% across the OECD, up from seven times 25 years ago.

 

“Arresting the trend of rising inequality has therefore become a priority for policy makers in many countries, including SA,” says Ms Kader.

In its latest wealth report, released in October and capturing trends to the middle of 2015, Credit Suisse, estimates that 3.4 billion individuals – or 71% of adults worldwide – have wealth below USD 10,000, while the group of millionaires, who comprise less than 1% of the global population, account for 45% of total wealth.

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,” says Ms Kader.

The OECD says in a 2014 report on Top Incomes and Taxation that increasing taxes for top income earners tends to involve “difficult trade-offs”. On the one hand, it is often assumed that higher top marginal tax rates would result in lower economic growth, largely via disincentive effects. On the other hand, lower inequality resulting from such tax changes may reduce persistent differences in income, wealth and power between socio-economic groups.

“Several options for tax reforms that increase the average tax rate paid by top income recipients without necessarily raising their marginal rates do exist, like scaling back on tax deductions, fringe benefits, carried interest, treaty shopping – but these measures to improve tax collection are already being applied, for the most part, in SA,” says Ms Kader.

 

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, she says. As pre-tax income inequality increases, the role of tax policy becomes even more important.

“The most important of these measures is broadening the tax base of the income tax to reduce avoidance opportunities and thereby the elasticity of taxable income,” says Ms Kader.

The MTBPS focuses strongly on levels of revenue collection and expenditure and fiscal policy and economic projections for the next three years, but it was used as an important platform a year ago to prepare society for higher tax rates.

“The reference in the previous MTBPS to the enhancement of the progressive character of the fiscal system suggested that higher-income earners may pay higher taxes, come 1 March 2015, and this is indeed what happened,” says Ms Kader. “It is likely we will get an update now on whether further increases in wealth taxes can be expected next year,” she says.

It is estimated that there are approximately 2,900 individuals in South Africa who fit into the category of high net worth individuals (i.e. individuals whose annual gross income is R7 million or more and/or whose gross wealth is R75-million or more).

“It is increasingly important 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 members. One has to take cognisance of the burden this group of taxpayers already bear,” says Ms Kader.

The consideration of a wealth tax has already been on the table for two decades since the Katz Commission addressed it. According to Ms Kader, the commission recommended against it on the grounds that it was inappropriate because of the context that South Africa found itself in. In any event there was acknowledgement that the South African tax system already taxed wealth at different stages.

The Davis Tax Commission has also been tasked with investigating wealth taxes and has recommended a review of estate duties, but has not gone so far as calling for another layer of wealth taxes on top of what already exists.

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 programs, according to a World Bank Group (WBG) report in November last year.

Against the backdrop of a high fiscal deficit and rising debt burden, the World Bank says it is essential that the government uses its existing resources effectively in the fight against poverty and inequality, according to the report.

The report shows that the poorest in South Africa benefit from social spending programs. 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 (PPP). 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.

“Fiscal policy is already progressive and works to reduce inequality. The income gap between the rich and poor, when social grants and other transfers are taken into account, is narrowing,” says Ms Kader.

The number of people living in extreme poverty around the world is likely to fall to under 10 percent of the global population in 2015, according to recent World Bank projections, giving fresh evidence that a quarter-century-long sustained reduction in poverty is moving the world closer to the historic goal of ending poverty by 2030.

“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 10-fold, 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,” says Ms Kader.

Media contacts:
 

Inga Sebata
Magna Carta (PR)
Tel: +27(0) 11 784-2598
Email: inga@magna-carta.co.za


Kylie King
Deloitte & Touche
Tel: +27 (0)11 209 8703
Email: kyking@deloitte.co.za

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