Barbara Curson
5 minute read
4 May 2020
7:30 am

Raising revenue through a wealth tax is clutching at straws

Barbara Curson

No thought is given to any clawback of any wealth taxes paid if the value of wealth decreases.

Picture: Moneyweb

These are bad times. The government is promising capital before it has managed to raise it, the South African Revenue Service (Sars) is struggling, and the economy is in lockdown. Additional funds are desperately needed.

Placing the wealthy – the apparent 10% – in the spotlight is a tried and tested tactic to divert the attention away from unsolvable issues.

Sadly, there are no research papers on the untaxed illegal earnings of the tobacco smugglers, the money launderers, the criminals who benefitted from state capture, and the rest of the motley crew of helpers.

Therefore, unsurprisingly, the wealth tax has resurfaced.

What is wealth?

There is a misconception that ‘wealth’ is not only fungible, but that it has an ascertainable exact value at a point in time, and that the value increases over time.

No thought is given to any clawback of any wealth taxes paid if the value of wealth decreases.

One research paper I looked at did mention the capitalisation of income streams in the calculation of wealth. Most accountants would roll their eyes at this (so many debatable assumptions).

An acceptable equation for wealth is that it equals the sum of the value all assets, including intangibles, less debt.

But how is value defined? At a point in time? The increase from one point to another? What about a decrease? Historical cost, fair value or market value? How does one place a market/fair value on a house in an illiquid market? How does one ascertain the market/fair value of a share in a privately held company? (It may not be possible to sell the share, and there is no right to a dividend).

Would an economist, an accountant, and a tax lawyer be able to agree on a definition of value, or on the definition of wealth, for the purposes of a wealth tax?

The valuation of assets becomes more complicated when an intangible asset is included. There is no agreed methodology for the valuation of an intangible asset.

An accountant, a patent attorney, and a tax official walk into a bar … And the tax lawyers look forward to settling the argument in court. And let us not forget the expert witnesses, each one defending a differing valuation.

Tax authorities busy enough as it is

The increasing number of transfer pricing cases between tax authorities and taxpayers around the world are an indication of the difficulties faced in valuing purchases and sales between connected parties.

And now a tax authority must grapple with putting a price tag, and a taxable value, on a person’s wealth? Where there is no starting point of an arm’s length price for comparative purposes as in transfer pricing?

(Researchers seem to think that all assets have an ascertainable market value).

Sars will no doubt grapple with unpacking basic wealth structures, never mind the valuation of intellectual property, and locating wealth that has been ferreted away in blind trusts and shell companies around the world.

It was for good reason that Sars introduced the successful special dispensation for the declaration of offshore assets – the voluntary disclosure programme (VDP) – in October 2012, to persuade residents to declare their offshore assets and income.

Offshore assets add further complexity. How would the calculation of wealth at a point in time deal with foreign exchange rates? At the spot rate, at the hedged rate? And how would the ‘growth’ in ‘offshore wealth’ be calculated?

Before taking a blind stab at this, attempt to decipher the wording of Section 24I of the Income Tax Act (foreign exchange gains and losses), and study some of the cases that have been considered by the courts. A recent tax case that turned on the interpretation of this section, which the judge said was badly drafted, may be appealed to the Constitutional Court.

The drafting of the legislation to bring in a wealth tax may well be the straw that breaks the camel’s back.

Wealth taxes

The Davis Tax Committee, in its report for the minister of finance in 2018, the Feasibility of a Wealth Tax in South Africa, notes that South Africa already has “wealth taxes in the form of transfer duty, estate duty and donations tax”.

“The growth in investments is taxed, interest is taxed as it is earned, and drawing down from a retirement/pension fund is taxed (portion of which includes growth)”.

Dividends are taxed when paid. Capital gains tax or income tax is paid on the profits made on, for example, selling an investment, property, or capital asset.

Further, home owners and land owners already pay rates and taxes on the property valuation (and these valuations are often disputed).

Would including property in a wealth tax not amount to a double tax?

The government has previously clawed back or levied taxes. One example is the transitional levy of 5% payable on taxable income by all companies in 1995, before the deduction of any assessed loss brought forward. This was therefore beyond an ‘income tax’. Another example: in 2002 the government expropriated all privately held mineral rights, and now charges a royalty to the licence holder.

It is generally agreed that there is an optimal level of taxes that will be paid by taxpayers, and that higher taxes will lead to a reduction in taxes collected (this is referred to as the Laffer curve).

South Africa may well have reached that point. In today’s environment, it would not be unrealistic to speculate that there is a ‘gatvol level’.

In my view, higher taxes will make the investment in tax avoidance schemes more attractive. Add to this a liquidity shortage and high interest rates, and one has the perfect environment for tax avoidance. Without providing more details, Sars can work this out and add it to their ‘risk engine’.

The government has not managed to collect and redistribute wealth to its poor in an honest, transparent and efficient manner while providing the requisite infrastructure for the provision of water, homes, electricity and education. But this has more to do with ineptitude, internal corruption, state capture, mismanagement of state-owned entities (SOEs), and SOEs blatantly squandering capital than the wealthy citizens not paying their fair share of taxes.

Brought to you by Moneyweb

For more news your way, download The Citizen’s app for iOS and Android.