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Why You Can’t Tax A Country Into Prosperity

A wealth tax may be the fastest way to plug the holes in government finances, but it’s dangerously unsustainable, according to Hannes Van Den Berg, CEO of Momentum Consult.

Last week saw the arrival of the first Covid-19 vaccines on our shores. They are the first batch of a total of 500,000 that are being provided by Johnson & Johnson (J&J) to South Africa free of charge.

But the next lot that we’ve procured (another 9 million doses from J&J) will need to be paid for. Against a backdrop of dire economic growth, record unemployment and low tax revenue, the obvious question is: how are we going to pay for them? It’s widely speculated that the Minister of Finance may unveil a “wealth tax” in his Budget Speech on 24 February 2021.

What is a wealth tax?

A wealth tax is levied on people whose net worth is above a certain threshold.

A recent study by the World Inequality Lab suggested a range of taxes that could be levied on South Africans with a net worth over R3.8 million and that these could raise up to R160 billion for government coffers. At a time when the World Bank has estimated that 100 million people were pushed into poverty in 2020 alone, it’s easy to see how this can be an attractive option.  But does it make sense in a South African context?

Hannes Van Den Berg, CEO of Momentum Consult, cautions that this might seem like a quick fix but it carries dangerous long-term consequences.  “A wealth tax is a short-term tool to fix a long-term problem. It’s a fast way to fill the holes that have been left by the mismanagement of public funds, but it’s not a lasting solution”, he says.

A wealth tax is not without its risks

“South Africa has a relatively well-developed tax regime which resembles those in first world countries”, he continues. “The problem is our dwindling individual taxpayer base”.

That taxpayer base is already paying a host of direct and indirect taxes. Capital Gains Tax, Transfer duty, estate tax, donations tax…the list goes on. Burdening the wealthier segment further risks driving them away, whether this is down the path of tax resistance or emigration. “The level of tax is so high that people are either looking for other, often riskier, ways to mitigate their tax burden or they avoid paying tax altogether”, he says.

He also points out that in a capitalist system, those willing to risk their capital for the country’s growth would reasonably expect some return. “However, if they are taxed to the point of no return, they can easily lift their roots and find their successes in another country”, he says.  The “Brain Drain” is a very real threat, he adds. Prohibitively high levels of tax is fast becoming a major reason people leave the country.   This is evident in the rising number of questions about offshore structures and tax havens advisers that Momentum Consult is receiving. Neither tax avoidance nor emigration are helpful for economic growth. And with job creation facing an uphill battle, the number of individuals who can be taxed will be spread even thinner.

“You simply cannot tax a country into prosperity”, he says. “It’s like Winston Churchill once said: ‘…for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle’”.

Where to find help

If you’re concerned about how a wealth tax may impact you if implemented, he recommends speaking to a professional financial adviser. “The value of advice is essential here. The level of tax is so high people simply don’t want to, or can’t, comply. They are intentionally avoiding tax or looking to options like e-Currency to circumvent tax measures. And as we’ve seen, these come with many risks to well-meaning people who panic and move their money into risky ventures, often paying a high price.”

“A trained professional can help you reconsider your current investments and the various tax vehicles available, advise on the relevance and structure of your trusts in a South African and international context and make sure you understand all the elements involved in financial emigration. Whichever path you choose, make sure you don’t go at it alone”, he says.