A wealth tax on South Africa’s top 1 percent would reduce financial inequality, help rebuild post-COVID, and could bring in up to $10.6 billion annually, researchers say.
A paper published January 20 on the World Inequality website said that after taking into account the financial impact of tax evasion, offshoring, and other forms of tax avoidance, the revenue from a tax on the assets of the country's wealthiest residents would account for 1.5 to 3.5 percent of GDP.
The paper says revenue from a progressive wealth tax "would be sufficient to cover about two-thirds of all government health expenditures. It would correspond to over 40 percent of yearly receipts from [VAT]."
To reach those estimates, the authors examined raw data obtained from the South African Reserve Bank, the National Treasury, and household surveys, which they used to determine the country’s distribution of wealth in 2017, according to the research paper. The data took into account a population of 35.6 million adult taxpayers, approximately 32 million of which make up the bottom 90 percent of the country’s wealth. The remaining 3.56 million are in the top 10 percent.
To account for economic and behavioral changes that have occurred since 2017, the authors reduced the average wealth threshold for each group by 20 percent to represent the impact of COVID-19 on stocks and bonds, factored in a tax evasion rate, and then calculated the potential revenue by imposing a tax rate of 1 to 9 percent on the top 1 percent.
The authors used a wealth tax simulator to evaluate the potential impacts of wealth taxes in three categories: low (1 to 3 percent), moderate (3 to 7 percent), and high (3 to 9 percent). The simulation also considered whether taxpayers would be able to evade 10, 30, or 50 percent of the tax by using tax avoidance strategies. The benchmark scenario was a 30 percent evasion rate with a moderate 3 to 7 percent tax rate.
“Depending on the extent of evasion, we estimate that a moderate wealth tax . . . could raise about ZAR 70 billion to ZAR 160 billion [about $4.6 billion to $10.6 billion] — or 1.5 percent to 3.5 percent of GDP," the authors said. "In our benchmark estimate of a 30 percent evasion rate, the tax would raise 2.8 percent of GDP, or about ZAR 134 billion.”
The authors said a wealth tax would generate more revenue than the country's existing transfer and estate duties. “In our benchmark scenario, the wealth tax would collect about 20 times more money than transfer duties, and as much as 60 times more than the estate duty. A moderate wealth tax would be sufficient to cover some 85 percent of debt-service costs and about 60 percent of all expenditures on social protection — including social security spending, all social grants, and provincial social development,” the paper says.
“The idea of implementing a wealth tax has [been] highly debated, yet very little is known on wealth inequality and expected revenue from a wealth tax in South Africa," Léo Czajka of the Louvain Institute of Data Analysis and Modeling in Economics and Statistics, a co-author of the paper, told Tax Notes in a January 21 email. "Our work aims at providing suggestive evidence to answer these questions.”
Czajka said he and his research colleagues hope the report and simulator will be useful and fully transparent tools that can be used in public discussions about the proposed tax.
Interest in the implementation of a wealth tax to help curb the financial and economic impacts of the COVID-19 pandemic has been gaining speed in other countries. In 2020 Bolivia, Spain, and Argentina moved to adopt a tax on the wealthy and even large corporations.