By Anthea Jeffery
Thomas Piketty’s tome on Capital in the Twenty-First Century, published in 2014 and much acclaimed by the media around the world despite its many weaknesses, has reignited interest in wealth taxes as a key tool to reduce inequality.
The ruling African National Congress (ANC) is understandably keen on this idea, as it needs more revenue to fund the bloated civil service, sustain high levels of other wasteful (and often corrupt) spending, and avoid the policy reforms required to stimulate growth.
The Davis Tax Committee has thus called for submissions on the desirability and feasibility of an annual wealth tax. Its deadline for comment is today, 31st May.
The committee should consider the impact of Piketty’s tax proposals, as modelled in 2014 for the US economy by Dr Michael Schuyler of the Tax Foundation in Washington DC.
Dr Schuyler’s model shows that Piketty’s proposed wealth taxes – if the threshold for liability was to start at net wealth of $260 000 – would reduce current US GDP of some $17 trillion by 6.1% per annum or roughly $1 trillion a year.
His modelling also shows that Piketty’s proposed wealth taxes – at rates of 0.5% for those with net wealth of between $260 000 and $1.3 million, 1% for net wealth between $1.3m and $6.5m, and 2% thereafter – would be even more damaging than Piketty’s proposal to raise top income tax rates to 80% and 55%.
According to Dr Schuyler’s research, if US income tax rates were to be raised to 80% on incomes starting at $750 000 a year and to 55% for those earning around $220 000 a year, then current US GDP would be reduced by 3.5% or roughly $595bn a year. This is considerably less than the $1trillion reduction in GDP that the wealth taxes would usher in.
Why is this so? As Dr Schuyler explains, a 1% tax on wealth might not sound high, but ‘three factors magnify the potential harm to the economy’. He goes on: ‘First, a wealth tax of a given percent is equivalent to an income tax of a much higher percent. For example, if the pre-tax return on an asset is 8 percent, a 1 percent wealth tax on the asset would take away one-eighth of the income. That is the same tax bite as a 12.5 per cent income tax rate.’ Second, much of the wealth to be taxed would be the productive capital that helps sustain employment and economic activity. Third, Piketty’s wealth tax would be levied every year and on top of all existing taxes.
With South Africa’s annual growth rate now hovering at around 1% of GDP, the country Africa simply cannot afford GDP reductions of the kind that Dr Schuyler’s modelling suggests. Moreover, the impact of the wealth tax would not be confined to the most wealthy. Instead, it would percolate down to the entire population, leaving all South Africans the poorer.
The government’s annual tax take, including indirect and other taxes, is already very high, amounting to some 30% of GDP. This is far higher than the tax take in most other countries and signals that the tax burden needs to be reduced, rather than increased.
In addition, South Africa has a tiny tax base. It is heavily dependent on a small group of individuals (about 560 000) and companies (about 610) that pay around 60% of the personal and corporate income taxes collected each year. Imposing a wealth tax on this small group could encourage a flight of capital and skills which would further hobble the economy.
In addition, a wealth tax cannot address the underlying reasons for the inordinate asset inequality evident in South Africa. These reasons are deeply rooted in the past, but they also have much to do with the government has done (or failed to do) since 1994.
For example, while some 1 million whites own their homes, so too now do 7.7 million black Africans. This shows a rapid shift from the profound injustice of the apartheid era, when home ownership by Africans was largely prohibited. But whites generally have title deeds to their houses, whereas most Africans still do not.
In addition, despite the constitutional promise of tenure reform, some 16.5 million Africans living in former homeland areas have yet to be accorded individual title to their customary plots.
An employee holds South African Rand notes in this arranged photograph in London, U.K. Photographer: Jason Alden/Bloomberg
Under the land reform programme, moreover, some 8.2 million hectares of land have been transferred from whites to blacks. But beneficiaries have generally been barred from obtaining individual ownership and are often confined to being tenants of the state.
The government has also hobbled the economy through a series of damaging policy interventions, now compounded by a growing threat to property rights. It has insisted on a flawed form of black economic empowerment (BEE) which helps only a small elite while harming the remainder. It has also failed to provide adequate education, housing, or health care, despite the enormous revenues (R680bn in the current financial year) allocated to these core needs.
In addition, it has allowed the wage bill for the ineffective public service to spiral to the point where civil service remuneration absorbs some 40% of government spending. This is roughly twice the average for other emerging economies.
At the same time, the ANC has failed to act against fraud and inflated pricing, which now taint some 30% to 40% of public procurement totalling some R600bn per annum. This signals that around R200bn in public revenue is being poorly spent each year: mostly for the benefit of a narrow clique of cadres.
All these policy mistakes need urgently to be corrected. But the ANC is so deeply committed to its national democratic revolution that it cannot bring itself to embark on real reform. Hence, what the country most needs is neither a new wealth tax, nor the ejection of Jacob Zuma from the presidency, but rather to be freed from the ANC’s destructive rule.
*Dr Anthea Jeffery is Head of Policy Research at the Institute of Race Relations, a think-tank that promotes political and economic freedom.
Read article on BizNews here
