Wealth tax in SA would help grease ANC’s corruption machinery – expert

JOHANNESBURG — In functioning societies, paying taxes is probably less of a pain as at least you know that your hard-earned money will provide you with decent public services. However, in South Africa, rampant corruption seriously risks sparking a tax boycott as stories of corruption and wasteful expenditure emerge in the press on a daily basis. So, when Treasury earlier this year asked for a study into the introduction of a new wealth tax, the proposal was understandably met with criticism. Government is hoping to ultimately introduce additional wealth taxation, including a land tax, a national tax on the value of property – in addition to municipal rates – and an annual wealth tax. South Africans had until 31 May this year to submit written inputs to the Davis Tax Committee on the new forms of wealth tax. But in this piece, Dr Anthea Jeffery proposes that if government is serious about tackling poverty, it should rather look to privatising ailing state-owned enterprises as well as boosting the number of title deeds. Expect a lot of debate on this topic in months and years to come. – Gareth van Zyl

By Dr Anthea Jeffery*

The leaked Gupta e-mails blow any possible case for the new annual wealth tax the Davis Tax Committee is busy considering right out of the water.

Dr. Anthea Jeffery is Head of Policy Research at the IRR and author of Patents and Prosperity: Invention + Investment = Growth + Jobs, published this week by the IRR and available on the IRR website.
Dr. Anthea Jeffery is Head of Policy Research at the IRR.

The daily diet of leaked Gupta e-mails has shown South Africans how billions of rands have been siphoned off from SOE funds and taxpayer revenue for the benefit of the Guptas and their favoured cabinet ministers and political friends.

The problem of corruption in South Africa is not, of course, a new one. No one knows quite how much has been siphoned off, but the rot goes all the way back to the 1999 arms deal, the Travelgate scandal uncovered in the early 2000s, and the persistent small-scale fraud that has long tainted the government’s low-cost housing scheme, the social grant system, and the issuing of driving licences and ID documents.

A culture of impunity as regards corruption goes back to 1999 as well. The arms deal probe was effectively scuppered by President Thabo Mbeki and key cabinet ministers. The Travelgate investigation was blocked by Baleka Mbete and others, while the few ANC MPs who were convicted were let off the hook with minor fines. Officials who admitted to having defrauded the fiscus of millions of rands (R34m in the social grants and housing spheres in 2008 alone) were allowed to pay back small amounts of money over many years. No one lost their jobs and no minister accepted accountability.

The culture of impunity was strengthened when the Scorpions were disbanded in 2008; when the 783 counts of corruption, fraud and other crimes confronting ANC president Jacob Zuma were withdrawn on spurious grounds in April 2009; when nothing was done to stop the award of lucrative tenders and mining rights to the ANC’s acknowledged funding vehicle, Chancellor House; and when a persistently blind eye was turned to the way in which preferential procurement was further fuelling corruption.

How preferential procurement helped foster corruption was pithily described back in 2012 by an anonymous BEE businessman, who told The Star that he had little choice but to charge inflated prices to ‘recoup the costs of paying mandatory kickbacks’ to corrupt officials and ‘regularly donating huge sums’ to the ANC.

Said the businessman: ‘You pay to be introduced to the political principals, you pay to get a tender, you pay to be paid [for completed work], and you must also “grease the machinery”. From time to time, you are called upon to make donations to the…ANC. There are also donations to the youth league, the women’s league, and the SACP.’

Those who failed to make the necessary payments either in cash or ‘in kind’ – by giving subcontracts to the relatives of public servants and politicians – would find themselves excluded from state contracts cumulatively worth billions of rands.

Though few other businessmen have admitted to making payments of this kind, the comment seems to provide insight into a wider pattern of conduct. It is also consistent with what Kenneth Brown, former chief procurement officer at the National Treasury, said last year, when he warned that between 30% and 40% of the state’s R600bn annual procurement spend was ‘tainted by fraud and inflated prices’. That amounts to roughly R200bn a year.

That sum far dwarfs the R15bn or so which tax and financial planning experts think a new annual tax on net wealth might generate. (This figure, amounting to some 0.4% of GDP and about 1% of the total tax take, is consistent with what annual wealth taxes yield in the few countries which levy them, see Table 1 below.)

Read also: ANC cherry-picking Davis wealth tax findings could prove a disaster

The Davis Tax Committee does not, of course, condone corruption. Nor is it unaware of its extent. However, it seems unwilling to accept that, unless corruption is effectively curbed, much of the revenue generated by any new wealth tax will likewise end up in the hands of a small clique of ANC cadres spread across all tiers of government and a host of SOEs.

Moreover, even if corruption could effectively be ended, a new wealth tax would still do little to overcome inequality.

A major factor contributing to high income inequality (0.63 on the Gini coefficient) is the increasing gap between the rich and the poor within the African majority, which makes up 80% of the country’s population. Since the political transition, BEE deals and preferential tenders have helped turn a small African elite into millionaires (and sometimes even billionaires), even as unemployment among Africans has more than doubled.

Read also: Can an annual wealth tax save SA economy? Here’s how the rich can help – finance ministry

On the strict definition (which counts only those actively looking for work), the number of jobless Africans has grown from 1.6m in 1994 to 4.9m in 2016, an increase of roughly 200%. On the expanded definition, the number of unemployed Africans has gone up in this period from 3.2m to 7.9m, an increase of close on 150%.

Many of South Africa’s unemployed are young Africans aged 15 to 24, among whom the official jobless rate is almost 60%. On the expanded definition, joblessness among African youth stands at a staggering 72%.  

The most effective way to counter inequality is to cut the jobless rate to 6%. This requires an emphasis on growth, rather than redistribution. It also needs major economic liberalisation, not the ratcheting up of an already very high tax burden.

Once millions more people are earning an income, wealth inequality will also come down (see Table 2 for how South Africa compares here with other countries). In the interim, the ANC could kick start this process by giving 10 million or more Africans formal title deeds to their houses, customary plots, and land reform farms.

The government could also give the process yet more impetus by privatising our many failing SOEs. If Eskom, Prasa, Transnet, and SAA were sold off in an open, competitive, and transparent way and much of the proceeds were distributed to the poor, this would do far more to overcome inequality than a new wealth tax would ever be able to achieve. It would also be more effective than almost any other measure in putting a quick stop to the Gupta-style looting of the country’s SOEs.

  • Dr Anthea Jeffery is Head of Policy Research at the IRR

Table 1

Revenue from annual wealth taxes in various countries

Country % GDP %Total tax receipts
Argentina 0.3% 1%
Colombia 0.67% 3.2%
Uruguay 1% 3.75%
France 0.24% 0.5%
Norway 0.56% 1.4%
Spain 0.1% 0.3%
Switzerland 1.2% 4.5%
South Africa 0.4% 1% (as estimated by tax/ financial planning experts)

Table 2:

Country Gini
South Africa 0.83
United Kingdom 0.73
United States 0.86
France 0.72
Brazil 0.83
China 0.82
India 0.88
Turkey 0.83
Malaysia 0.80
Mexico 0.78
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