key topics:
- Mayor proposes tax to equalize rental market.
- Digital nomads increase costs for locals.
- Tax could hurt Cape Town’s appeal to remote workers.
By Ivo Vegter
Instead of welcoming digital nomads with open arms, Cape Town wants to make itself a less attractive destination.
“Digital nomads row – Cape Town mayor suggests tax on short-term rentals to protect locals,” reads the headline in Daily Maverick.
The article continues: “Cape Town’s problems with digital nomads are well documented – from claims of driving up rental costs to causing a shortage of accommodation, particularly in the centre of town. What is to be done? Cape Town mayor Geordin Hill-Lewis says one option is to put everyone on an equal footing by implementing suitable taxes on short-term rentals.”
There are two separate issues at stake here. One is the question of a “level playing field”.
“You can’t come into a very tourism-rich market and basically run a small hotel,” he said, according to the article. “[I]f you’re running a permanent Airbnb, that’s what it is, but you’re not taxed like a hotel, you’re taxed like a private house.”
The proposed tariff readjustment would apply only to entire properties that are permanently rented out on a short-term basis, and not to people who only rent out a garden flat or rooms in their home.
Says the story: “He [Hill-Lewis] explained that he could not tell developers of major hotel chains that they needed to pay business tariffs in the city because they run hotels while others who run operations like these on a much smaller scale do not.”
There is some merit in this argument. However, as discussed recently in my column on tourism grading, this seems like a 20th century approach to business.
Intervening in a modern section of the market that functions perfectly well, just to accommodate more traditional competitors who operate under old-fashioned regulations, suggests that the problem lies with the old-fashioned regulations, and not with the modern market.
Red tape
Making it easier for people to conduct business means removing red tape and reducing the cost of doing business.
Hill-Lewis’s argument that small-scale operators ought to be treated the same as large businesses flies in the face of other commitments the Democratic Alliance (DA) has made.
Read more: Digital nomads are here to stay (and spend)
In its election manifesto, for example, it proposes to exempt small and medium-sized enterprises from collective bargaining agreements.
“Collective agreements extended throughout an entire industry, including small businesses, compel these enterprises to implement the conditions contained in these agreements,” the manifesto says. “This poses a financial challenge for small businesses as they struggle to match the economies of scale enjoyed by larger counterparts. Additionally, these agreements frequently overlook the financial viability of smaller entities. Exempting SMMEs from this obligation will make it cheaper and easier for them to hire people.”
It also says: “We cannot grow the economy without controlling our public finances, slashing red tape, and enhancing competition.”
If an exemption can be made for small businesses in labour law, why shouldn’t it also be made in tourism accommodation?
If anything, the fact that self-regulating tourist accommodation functions as well as it does suggests – as I argued before – that the more formal, traditional accommodation sector ought to be deregulated, rather than imposing new regulation on modern digital-era businesses.
Intervention
The second issue is whether the government ought to intervene in the market to discourage letting property to digital nomads and tourists.
South Africa has just introduced a remote work visa, which accommodates digital nomads who derive an income north of R650 796 from a foreign employer. Valid for six months (as opposed to three for an ordinary tourist visa) and extensible to 36 months subject to registering with the South African Revenue Service (SARS), this visa is similar to digital nomad visas issued by other countries that have become popular in the last five years.
(As an aside, the income requirement seems arbitrary. It isn’t unreasonable, being about 20% above the median income in the European Union, and below that of the United States, but I fail to see why people who earn less, but comply with all the other requirements, shouldn’t qualify for a remote work visa.)
Competition
Cape Town competes with hundreds of other locations for digital nomads. Cities hope to attract this kind of wealthy traveller because they boost local economies with their spending, and they contribute to a location’s entrepreneurial vibrancy. They may also become, or help to attract, long-term investors or even employers in destination countries.
A study in Greece found that attracting 100 000 digital nomads that stay six months each would raise €1.6 billion (R30.7 billion) for the local economy, equivalent to the income generated by 2.5 million tourists who each stay a week.
Barbados reported that within the first ten months after implementing its Welcome Stamp – a one-year remote working visa – it processed 2 500 applications, levied $6 million (R110 million) in fees for the fiscus, and generated more than $100 million (R1.8 billion) in tourism revenue.
Digital nomads are much more valuable to a local economy than ordinary tourists. They spend more, and they stay longer.
Destination
As a destination, Cape Town currently ranks fourth in the world on the digital nomads support site nomads.com, after Bangkok in Thailand, Da Nang in Vietnam, and Kuala Lumpur in Malaysia. Despite the favourable exchange rate of the rand for foreign visitors, however, it is the second most expensive destination in the top ten, after Ericeira in Portugal.
It has a lot going for it, of course. It has a pleasant climate, amazing scenery, a well-developed food and culture scene, excellent private healthcare, great getaway locations within the range of a tank of fuel, amazing sporting, outdoor and adventure opportunities, and wonderful people.
It also has downsides, however. It is far off the beaten track, requiring long-haul flights to almost everywhere. It has a reputation for bureaucratic rigmarole. It suffers from periodic loadshedding. And it isn’t the safest place in the world.
Making it even less welcoming to digital nomads, by taxing their short-term accommodation options, seems like the very opposite that a city like Cape Town would want to do.
The same goes for other tourists, including South African travellers, who will be negatively affected by higher taxes on short-term rentals.
Locals
Local residents might complain about rising rental prices, but I’m pretty sure property owners don’t. And, as I’ve argued before, the state has no business directing how people may use their private property, provided they don’t violate the rights of their neighbours.
As I wrote: “If people want to live in ideal holiday locations on a long-term basis, then they ought to pay what tourists are prepared to pay. If not, they should select more modest housing that is not more efficiently used to accommodate tourists.”
Cape Town should be proud of its attractiveness as a destination for digital nomads to live and work. They boost the local economy with their spending on accommodation, food and drink, transport, entertainment, healthcare and clothing. They add to the “happening vibe” of the city, and catalyse its entrepreneurial spirit and business networking potential.
Penalising short-term rental operators to benefit residents who want cheaper long-term rentals is short-sighted, and exactly the sort of anti-business intervention in the economy that the DA traditionally campaigns against.
If there is pressure on the existing stock of residential housing, the smarter policy would be to make it easier for developers to expand the stock of residential housing.
Read also:
- Remote work revolution: Digital nomad visas expand globally
- Endeavor SA – Great start Dr Schreiber, SA can capitalise on Nomad visas, reap benefits
- The looming reality of a wealth tax in South Africa
This article was first published by the Dailyfriend and has republished with permission
Ivo Vegter is a freelance journalist, columnist and speaker who loves debunking myths and misconceptions, and addresses topics from the perspective of individual liberty and free markets.
