Wealth tax for national healing?

Saturday, 16th December is an important day in the South African calendar as it marks the Day of Reconciliation. The significance dates back to two events in history. The first of these was in 1838, when the Battle of Blood River took place, and 470 Voortrekkers (who had the advantage of gunpowder) defeated the 10,000-strong Zulu army. This was after the Zulu chief, Dingane, misunderstood the Voortrekker leader, Piet Retief’s, intentions to negotiate, so murdered him and his party. This Voortrekker victory was then commemorated as the Day of the Vow.

The second historical event that took place on this date was in 1961 when the military wing of the African National Congress (ANC) — Umkhonto we Sizwe (MK) — was formed to fight the Apartheid government, when it had become clear that passive resistance was no longer an option. Its formation has been commemorated every year since 1961.

However, this date was only first celebrated as a public holiday in South Africa on 16th December 1995, when it was renamed as the Day of Reconciliation. This was done as an endeavour by the country’s first democratic government to promote reconciliation and national unity by acknowledging the importance of this date to both the Afrikaners and the liberation struggle.

According to an article published in The Conversation, the South African government that ruled from 1994-1999 can largely be credited with trying to foster unity, heal wounds, and make attempts at socio-economic development. However, this 16th December, it has become clear that a great deal of damage has been caused by South Africa’s current administration led by President Jacob Zuma. Amidst state capture allegations, the country is now in recession, has been downgraded to junk status by credit agencies, and the corruption at the root of these issues has scared off many investors and eroded any trust in government.

It is clear that South Africa is in desperate need of a government that promotes national unity and healing again.

National healing will indeed require sacrifices from all South Africans to ensure a better future, and the possibility of a wealth tax has been raised as one of the ways citizens could contribute to the interests of the whole country. However, this only stands a chance of working if the money would be put to good use and not wasted through corruption and inefficiency.

A document published by the Davis Tax Committee highlights that “the distribution of wealth in South Africa is highly unequal… It is well established that economic inequality inhibits economic growth and undermines social, economic and political stability.”

South Africa currently has three forms of wealth taxation — estate duty, transfer duty and donations tax, which combined bring in about 1% of tax revenue. However, discussions are now focused on the desirability and feasibility of the following three possible forms of wealth tax — land tax, a national tax on the value of property (over and above municipal rates), and an annual wealth tax.

The article in The Conversation argues that “a wealth tax could play an important role in national healing if it was implemented with the necessary circumspection.” Likewise, an article published on Fin24 highlighted how “Judge Dennis Davis, who heads South Africa’s committee on tax reform, said that he supported a wealth tax as it was an important symbolic step to address inequality, even though it would raise a relatively small amount of revenue to plug the country’s widening budget deficit. He acknowledged that the controversy around corruption and state capture make this an awkward moment to take the step, but added that he could not allow “vast swathes of wealth to be immune to tax”.”

Although his remarks indicate that a wealth tax may soon be on the cards, there is still a lot of debate surrounding the issue and many arguments against it. Notably, it is argued that there are only 7.4 million taxpayers in South Africa who have already been squeezed so much, and many fear it would spur wealth creators to leave the country, which would further weaken the currency and fan inflation. It has also been argued that the introduction of a wealth tax wouldn’t actually address the structural problems that are responsible for the high rates of unemployment and poverty.

Although advocates support their beliefs with examples of economies such as Switzerland, where it has been a success, Fatima Vawda, the Managing Director of 27four Investment Managers, ascertains in an article published by the Daily Maverick, that the strategy has largely been a disaster in many economies where it has been tried.

Vawda also believes that we should rather broaden ownership of capital to ensure broad-based prosperity by using “pragmatic strategies that are aimed at maximising tax revenue… Imposing a wealth tax in a bid to stimulate prosperity should be the last resort.”

The tax committee’s call for public comment on the introduction of a potential wealth tax may have closed, but public hearings are likely to take place. This tax may not ever come to fruition, but it’s important to stay informed and prepare for eventualities in advance. If you are interested in discussing your thoughts on the matter, or learning more about how this development could potentially affect your financial situation, then don’t hesitate to arrange a meeting.

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