Minister of finance says no to wealth tax
Ahead of delivering the third attempt to get Budget 2025 passed, the minister of finance, Enoch Godongwana, said in parliament that he does not think a wealth tax is a good idea to find the money to make up the budget shortfall, as the wealthy people of the country already pay tax in many other ways.
Sanele Mwali, an MP for the MK party, asked Godongwana in parliamentary questions if he has considered implementing a wealth tax as an alternative to increasing VAT, which disproportionately affects low-income households.
Godongwana said in his reply that South Africa already has a multitude of instruments that tax wealth comprehensively through a combination of taxes on property (assets), which include estate duty, donations tax levied for any asset donations, all equity transfers taxed through a securities transfer tax and real estate transfers through transfer duty.
'In addition, all real estate (land and buildings) is taxed at local level through property rates and taxes,' he pointed out.
ALSO READ: Budget 2025: Is wealth tax coming for South Africa's rich?
Wealthy people already pay more tax in various ways
According to the minister, the total annual tax revenue collected from the four national taxes on wealth, excluding the local property taxes, amounted to R22 billion in 2021/22, R22.6 billion in 2022/23, R19.4 billion in 2023/24 and R21.3 billion in 2024/25.
'This is a contribution of 1.15% to total tax revenue, which compares favourably to the Organisation for Economic Co-operation and Development (OECD) average of 0.5% for similar taxes. In addition, South Africa levies capital gains tax, which is essentially a tax on wealth gains.
'Capital gains tax contributed an additional R15.6 billion to the fiscus during 2019/20 and R16.4 billion in 2020/21. Dividend tax and tax on interest are also taxes on the returns from wealth.'
ALSO READ: Will South Africa's rich pay wealth tax or find ways to avoid it?
Considerations regarding wealthy taxpayers and wealth tax
Godongwana said that when evaluating the most comprehensive and efficient approach to wealth taxation, government must consider that:
The tax base of high net worth individuals in South Africa is small and mobile.
The initial data from South African Revenue Service [Sars] indicates that there are 2 850 individuals with net assets above R50 million who have a total of R245 billion in local assets and R150 billion in foreign assets.
This group pays R7 billion in personal income tax (which is also on returns from foreign assets) and that revenue would be put at risk if they decided to change tax residency.
Should this group decide to relocate, it would impact negatively on capital and investment flows, as they often have business interests which generate employment and contribute towards economic growth and capital formation locally.
ALSO READ: Cosatu urges Sars to target wealthy tax dodgers
International examples show wealth tax does not work
The minister also pointed out that international examples show that several countries abandoned or significantly reduced the scope of their wealth taxes over the years, as they were ineffective. The reasons for abolishing the wealth taxes are the high cost of collection, administrative complexity, risk of capital flight and limited revenue gained from these taxes.
Only four countries currently have what can be termed 'wealth taxes'.
Godongwana said income tax is the most effective way to tax the wealthy, and it generates multiple times more revenue for the fiscus in a more efficient and cost-effective manner.
ALSO READ: 1.5% of SA population pay 61% of income tax: Are we overtaxed?
What the research shows about the effectiveness of a wealth tax
'Research by the OECD on the effectiveness of wealth taxes found that a comprehensive income tax system, which also taxes capital gains, is more effective at generating revenue and redistributing wealth than taxes that specifically target the stock of wealth.
'South Africa has a very comprehensive income tax system with progressive rates and high-income earners paying a top marginal tax rate of 45%. In line with international best practice, South Africa levies capital gains tax to make its income tax system even more progressive and comprehensive.'
He also emphasised that wealth taxes discourage savings. 'South Africa has a low gross savings rate of only 13.7%, well below its peers. Introducing a wealth tax will discourage people from saving.
'Rather than save and add to South Africa's overall savings pool, which is critical for investment and economic activity, wealthy individuals will rather consume their income or take it offshore. This will damage South Africa's long-term development prospects.'
ALSO READ: Many wealthy taxpayers are leaving SA due to increasingly high taxes
What about increasing corporate tax?
Mwali also wanted to know if Godongwana considered implementing progressive taxation measures, such as increasing corporate tax rates, to generate additional revenue and reduce income inequality.
Godongwana explained that South Africa has multiple tax instruments, with three accounting for more than 80% of total tax revenue. 'Personal income tax contributes the largest share, followed by VAT and corporate income tax.
'Our tax system is broadly progressive, ensuring higher-income earners contribute more, but not all tax instruments share the same level of progressivity. The ability to raise revenue from increasing the corporate income tax rate will depend on how companies respond.
'Empirical evidence shows various ways companies use to reduce their taxable income in response to tax rate increases, such as disinvesting or reducing investment plans and shifting profits out of high-tax countries.'
ALSO READ: Despite sharp decline in company tax, Sars collects R1.7 trillion
Increasing corporate tax detrimental to economic growth
He said that given that corporate tax rate increases are the most detrimental to economic growth, an increase can negatively affect revenue collection in the long run, which would reduce the government's ability to spend on redistribution programmes.
'South Africa's corporate income tax rate is already high when compared to most countries that have progressively lowered rates. This places greater pressure on Sars to police anti-avoidance measures.
'Alternative revenue-raising measures aimed at corporations are to broaden the corporate income tax base and enhance compliance. In this regard, South Africa has made progress in recent years through domestic reforms and international cooperation.
'The introduction of the global minimum tax will reduce the incentive for large multinational enterprises to shift profits and will bolster corporate tax collections from 2026/27.'
ALSO READ: President assents to Global Minimum Tax Act for multinational companies
Higher corporate tax will not reduce inequality
Godongwana pointed out that attempts to raise revenue by increasing the corporate income tax rate will not necessarily reduce inequality, as workers and consumers will feel the burden of a rate increase, not just shareholders.
He said in a study reviewing whether Canada should increase its corporate income tax rate, the researchers said 'while it is clear that people, not corporate entities, ultimately bear the burden of corporate taxes, a key question is which people? The answer to this question has important implications for the equity, or fairness, of the tax system.'
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