The Budget Speech delay and revenue challenges

On 19 February 2025, South Africa’s Budget Speech was postponed, reportedly due to concerns over a proposed 2% value-added tax (VAT) increase. The delay underscores the Government’s challenge of balancing revenue generation and cost reduction without adversely affecting economic impact. It was widely reported (although not corroborated) that senior officials within the African National Congress and Government of National Unity (GNU) have discussed a wealth tax as a possible alternative revenue source. This development highlights the need to assess the economic and administrative implications of such a tax, particularly in a context where fiscal pressures are mounting.

South Africa already employs certain wealth-related taxes, such as transfer duty, estate duty, and donations tax. However, these contribute only a small portion of total tax revenue. In 2018, the Davis Tax Committee (DTC) considered a wealth tax as a potential revenue source and recommended further research into wealth distribution before introducing a broad-based wealth tax. The DTC emphasised the need for accurate data to assess potential tax revenue and administrative challenges, underscoring the complexity of implementing such a tax. It was also at pains to state that a wealth tax was by no means a quick-fix solution to South Africa’s revenue needs.

Defining a wealth tax

A wealth tax is typically defined as a levy on an individual’s net wealth, calculated by subtracting liabilities (such as loans or mortgages) from total assets, which may include real estate, investments and high-value personal items. The design of a wealth tax can vary significantly, ranging from a one-time levy to an annual recurring tax applied above a specified threshold. However, there is little global consensus on the optimal approach to wealth tax policy, as mentioned in the DTC’s Report on the Feasibility of a Wealth Tax (DTC Report).

Evaluating the case for a wealth tax in South Africa

South Africa has one of the highest levels of wealth inequality globally. According to the DTC and research in 2016 by Mbewe and Woolard in Cross-sectional Features of Wealth Inequality in South Africa: Evidence from the National Income Dynamics Study, the top 10% of the population owns over 90% of the nation’s wealth. Proponents of a wealth tax argue that it could address this disparity by redistributing resources and funding essential public services, such as education, healthcare and infrastructure.

Critics argue that a wealth tax may place a higher relative burden on lower- and middle-income households if not carefully designed. The DTC suggests that wealth taxes do not always achieve their intended redistributive effect, raising questions about their effectiveness as a policy tool.

Challenges of implementing a wealth tax

Implementing a wealth tax presents several significant challenges. One key issue is the accurate valuation of assets, particularly privately held businesses, intangible assets and unique high-value items such as art and jewellery. The DTC has highlighted the administrative burden and potential for disputes regarding asset valuation as major concerns.

Another challenge is the risk of tax avoidance and capital flight. High net worth individuals may have the means to relocate assets offshore or restructure their financial holdings to minimize tax liabilities. Without stringent enforcement mechanisms and international co-operation, a wealth tax might not generate the expected revenue and could incentivize capital outflows, potentially undermining its effectiveness.

Lessons from international experience

Internationally, several countries have repealed their wealth taxes due to high administrative costs and limited revenue gains. For example, Denmark (1995), Germany (1997), Finland (2006), Sweden (2007), Spain (2008, later reintroduced in 2011 as a temporary measure) and India (2015) all abandoned their wealth tax regimes, primarily due to challenges in enforcement, depressed revenue collection and the complexity of asset valuation. These cases highlight the difficulty of designing an effective wealth tax that generates substantial revenue without excessive costs.

For South Africa, an emerging economy facing structural constraints, the practicality of a wealth tax depends on several factors, including administrative capacity, enforcement mechanisms, and its impact on investment and economic growth. Given these challenges, some experts, including the South African Revenue Service Commissioner Edward Kieswetter, have suggested that strengthening existing tax collection measures and broadening the tax base through improved compliance and economic growth initiatives may offer a more sustainable path to revenue generation.

Weighing the feasibility of a wealth tax

While a wealth tax has the potential to address inequality and generate additional revenue, its success hinges on robust policy design, effective enforcement and an understanding of its economic implications. The experiences of other countries suggest that a wealth tax is difficult to administer effectively and may not yield the anticipated immediate fiscal benefits, which is the exact purpose of the potential VAT increase and other fiscal considerations by the Government.

Furthermore, the theoretical literature offers limited guidance on the optimal design of a wealth tax, making it a contentious policy choice. Policymakers must consider whether a wealth tax would achieve its intended redistributive goals or whether alternative measures offer a more viable path to sustainable revenue generation. The decision to implement a wealth tax in South Africa will require a thorough assessment of its potential benefits and drawbacks in the context of the country’s unique economic and administrative realities.

Finally, as far back as 2018, Government recognised the extent of wasteful expenditure by introducing a specific limitation on deductions for state-owned enterprises where expenditure is fruitless and wasteful. In this context, the final words of the DTC Report perhaps leave some food for thought:

“Finally, most of the wealth tax submissions received by the DTC point to the fact that progress could be made in reducing South Africa’s levels of inequality by eradicating wasteful/corrupt government expenditure and curbing the levels of tax evasion that currently exist. Although government expenditure is not a part of the brief of the DTC, the Committee emphasises that the enhancement of existing wealth taxes, coupled with a decrease in unauthorised and wasteful expenditure and enhanced tax morality will go some way towards reducing South Africa’s unsustainable levels of inequality.”