Nibble the rich? A case for taxing the wealthiest South Africans

Despite loud claims to the contrary, some form of wealth tax in South Africa — especially of the very wealthiest — is both the right thing to do, and possible to achieve.

Published in Daily Maverick

By Michael Marchant

Following the unprecedented delay to the tabling of the Budget in February, there has been an inevitable flurry of opinions on where the state can find more revenue and where it can cut spending.

One of the most vocal arguments, especially in the pages of business media, has been a blanket and scathing dismissal of any kind of wealth tax. This argument not only ignores important realities in South Africa, but also glosses over recent global debates around the continued need to tax the very wealthiest, and how to do so.

Why the wealthiest can pay

The statistic cited the most often over the past two weeks is that 235,000 people (0.3% of the population) pay about a third of all personal income tax. As a result, the argument goes, a wealth tax is a non-starter because it would simply squeeze an overtaxed group too much, and many of this group would either emigrate or find ways to avoid paying.

This statistic is a disturbing one. It reminds us that the country’s tax base is vanishingly narrow, and that the economy urgently needs to grow and create jobs. But using this statistic to end discussions about a wealth tax is problematic for two reasons.

First, a high tax burden on people earning more than R1.5-million a year is not the most important injustice in South Africa. I would argue that a more important statistic is that the six wealthiest South Africans have a total wealth of R553-billion, while about 14 million people do not have the R27 a day needed to be above the food poverty line. We should not lose sight of the fact that inequality is the fundamental injustice that South Africa’s economic policy must address.

And second, the argument blurs the lines between high income earners and the wealthy, especially when it comes to tax. The 2024 Global Tax Evasion Report by the EU Tax Observatory shows that global data suggests that income tax actually becomes regressive and even converges to zero at the very highest percentile of income.

Put simply, most billionaires around the world pay negligible income tax relative to their economic income, and are thus undertaxed.

There are many reasons for this, including that wealthy individuals avoid paying income tax through various corporate or trust structures available to them where they live. As the report argues: “The fundamental problem is that income flows are difficult to measure and tax for very wealthy individuals, who can easily structure their wealth so that it does not generate much taxable income.”

Tax avoidance strategies

In 2021, ProPublica released Internal Revenue Service data showing how the world’s wealthiest men (Jeff Bezos, Elon Musk, Michael Bloomberg, Warren Buffet and George Soros) managed to regularly pay no federal income taxes due to tax avoidance strategies. Buffet and Soros are among the billionaires who have since called for a wealth tax.

In response to the rampant tax avoidance of the world’s wealthiest individuals, the EU Tax Observatory has called for an internationally coordinated mechanism to tax high net worth individuals who have at least $1-billion in wealth. The recommendation, which was presented to the G20 last year under Brazil’s presidency, calls for an annual tax equal to 2% of these individuals’ wealth, not just their reported income. The report estimates that this could generate global revenues of up to $250-billion per year from just 3,000 individuals.

It is instructive to look at South Africa’s six high net worth individuals (those with more than $1-billion in wealth). They are Johann Rupert, Nicky Oppenheimer, Koos Bekker, Patrice Motsepe, Michiel le Roux, and Christo Wiese. Together, these six individuals and their families are worth about R553-billion, according to latest estimates by Forbes.

A 2% annual tax on this wealth would bring in about R11-billion to South Africa’s fiscus, equal to more than two years of the National Prosecuting Authority’s annual budget.

Importantly, this would pale in comparison to the nearly R80-billion growth in these individual’s collective wealth last year, indicating that such a tax would not be unsustainable.

This is an important observation of the EU Tax Observatory — the global average “pre-tax rate of return to wealth for ultra-high-net-worth individuals (net of inflation)” over the past 40 years has been 7.5%, indicating that these individuals could absorb the higher effective tax rate.

Notably, a group of 260 billionaires wrote an open letter to world leaders at the World Economic Forum in Davos in 2024, calling for them to be taxed more fairly. They wrote: “Our request is simple: we ask you to tax us, the very richest in society. This will not fundamentally alter our standard of living, nor deprive our children, nor harm our nations’ economic growth. But it will turn extreme and unproductive private wealth into an investment for our common democratic future.”

This is not to say that only these six dollar-billionaires should be subject to a South African wealth tax. Any such tax should be broader than that. However, it does illustrate the problem with the blanket claim that the wealthiest in South Africa are overtaxed and could not absorb a wealth tax.

Why a global solution is necessary, and possible

The other argument commonly used to negate calls for a wealth tax is that it is too easy to avoid or evade. There is an element of truth to this. The use of shell companies, secrecy jurisdictions, and other murky corporate vehicles to avoid or evade tax is commonplace.

As noted above, the current reason that the wealthiest are undertaxed is largely because of their ability to structure wealth to avoid paying tax. Despite this, global research suggests that tax-driven migration to other countries is often overstated.

However, the bigger flaw with this argument is that it treats global financial secrecy as a fixed variable. As the EU Tax Observatory notes, “tax evasion is not a law of nature, but a policy choice” — multilateral and domestic action can be used to change the rules of the game to reduce tax avoidance.

A powerful example is found in the 2024 Global Tax Evasion Report, which shows that multilateral action to ensure automatic exchange of bank information has dramatically decreased offshore tax evasion by a factor of three in just 10 years.

This coordinated challenge to banking secrecy was once thought unthinkable, but it has been a significant success, even as other global efforts such as a minimum tax rate for corporations have been watered down.

The kind of global cooperation required is the reason Brazil brought the argument for a global minimum tax on high net worth individuals to the G20. As noted in the report commissioned by the G20 Presidency, getting sufficient buy-in to a global minimum tax standard would add significant value to domestic efforts to tax the wealthy.

The purpose of tax

A tax on high net worth individuals or other forms of wealth tax in South Africa are not a standalone solution to the current budget crisis. As argued by the Institute for Economic Justice, it is one in a host of possible options that could be used to generate more revenue, avoid austerity, and be utilised in the pursuit of more equitable and sustainable growth.

It is easy to get drawn into a narrow discussion about revenue figures and spending cuts that will “balance the books”. But we should not lose sight of the fact that who pays tax and how much is a question fundamental to our democracy, and the kind of society we want to live in.

We can choose a more equitable future, and how we tax the wealthiest in our society is central to that choice.