Thinkpiece: What the Wealth Tax call means for South Africans

Warren E Buffett sure knows how to toss a cat among the pigeons. True to form, in August the chairman of Berkshire Hathaway wrote an op-ed headlined "Stop coddling the super rich" for America's leading newspaper, The New York Times. It was a full frontal attack on a tax system that favours the wealthy.Buffett's well-argued and entirely logical proposals have become the rallying call for "wealth tax" agitators around the world.Including here in Sunny South Africa..Buffett, the world's most successful investor and the third richest man alive, is not your average billionaire. His modest home in Omaha, Nebraska wouldn't be out of place in a middle-income suburb of Johannesburg. He drives around the Midwestern city in a car most of us would have traded-in years ago. And despite Berkshire being one of the US's top 20 companies by value, Buffett draws the same salary he did a quarter century back – $100 000 a year..Ironically for a man who has done so well from capitalism, one of Buffett's pet peeves is the way wealth is unevenly distributed. He talks often of the "tyranny of the womb" – where those born into wealth get to make the wield its power without having earned it. He is particularly critical of those who use wealth to further their own ends, abhorring the practice of the rich paying politicians to protect their privileges..He says this continued lobbying of the US Congress by those who can afford to has created massive distortions in the American tax system. Buffett used his own situation to illustrate how unfair the system has become. Last year he paid $6.9m in tax, a lot of money but just 17.4% of his income. Percentage wise it was much lower than the 20 other people in his office who contributed between 33% and 41% of their incomes. "Most Americans struggle to make ends meet," Buffett wrote, "while we mega rich continue to get our extraordinary tax breaks. My friends and I have been coddled for long enough by a billionaire-friendly Congress.".Buffett has been banging this drum for years. Now the pressure to find ways of repaying the massive bailouts, people are starting to hear him. For instance, just after his well-publicized piece, the Spectrem Group surveyed a statistically significant sample of America's 235 000 millionaires. Just over two thirds said they supported the Government raising taxes on those who earning $1m or more a year..The snowball is also gathering momentum elsewhere. L'Oreal heiress Lilliane Bettencourt (the 90 year old whose picture from FT.com appears with this article) and 15 other French billionaires published a petition calling for an "exceptional (tax) contribution" by the country's rich. Across the border, 50 Germans calling themselves "The Wealthy for a Capital Levy" are urging the Bundestag to introduce a 5% levy for the next two years on the rich. They claim this will raise e100bn in sorely needed revenue to help rescue a teetering European Union. Further south, Spain re-introduced a wealth tax abandoned just three years with barely a whisper of resistance. And one of Italy's wealthiest citizens, Ferrari's chairman Luca di Montezemolo called for a 3% levy on the taxable income of those earning over e500 000..It's looks a bit like turkeys voting for Christmas..Amid all the attention sparked by Buffett's article, the concept of a "wealth tax" has been brought back onto the front burner here in South Africa. Archbishop Desmond Tutu returned to the proposal from his Truth and Reconciliation Commission that there be a one-off tax on "the beneficiaries of Apartheid" tax. Populist politicians have that baton from the well-meaning cleric. Some economists predicted a "wealth tax" in October's Mini Budget and will doubtless be doing the same in February. It's like a new cause has emerged..Somewhere between Omaha and Pretoria, Buffett's message got lost in translation. He is not trying to start an international wave of "wealth taxes". Far from it. Buffett believes America's system of rewarding effort and punishing sloth is the reason for its spectacular success – 5% of the global population, 25% of the world's wealth. What Buffett is arguing against is that playing fields have become weighted in favour of the rich and need to be leveled. Billionaires need to pay their fair share. Not less as they now do. But at least the same, proportionately, as the rest of the society..But interpreting headlines to suit our worldview is a popular pastime. For politicians it's a living. They rarely resist the temptation to feed the electorate's envy. And in a society with large income differentials, the rich are the softest of targets. More so because they are so easily classified racially. Destructive and dangerous in the long-term. But a guaranteed vote puller for the coming election..It's not only politicians who play this game. Throw in some bait at a middle class dinner table and you'll soon hear righteous outrage at those enjoying greater privileges. Why should someone be able to go to a better school/drive a nicer car/live in a fancier home just because his father made money? Why is society so heavily weighted towards those from wealthy families? Doesn't all of mankind deserve the same opportunities? Shouldn't we all be rewarded for what we do rather than who we know or where we come from?.All of which is entirely logical. But also fertile ground for simplistic solutions by those who would use them to forward their own agendas. A Mugabe-style wealth grab lands you, well, in modern day Zimbabwe. The slide from respected global community member to pariah state can be rapid. Steal some capital and you'll quickly chase the rest of it away. Leaving a shrunken economy, surging poverty and the kind of investors you really don't want – foreigners who demand eye-popping returns – financially or politically..Wealth taxes have been used against the rich for centuries. The Jews of Middle Age Europe were a regular target – as minority groups often are. Among the earliest documented was King William III of England's Window Tax of 1696. Targeted rather obviously at the wealthy, a flat rate of two shillings a year was levied on any house with up to 10 windows. This doubled for between 10 and 20 windows, and doubled again to 8 shillings (a tidy sum back then) for houses with 21 or more. Post Revolution France cottoned on, introducing a similar tax 100 years later. Which explains why there are so many old homes in Europe have bricked in windows. The British repealed the window tax in 1851. It lasted until 1926 in France..Paradoxically, once you increase taxes for the rich, they often end up actually paying less. The wealthy have the resources to pay accountants and lawyers to find ways to beat the system. Push them too far and they are not averse to attack the public purse directly through lengthy legal suits, in the High Court. Witness serial entrepreneur Dave King and, more recently, Steinhoff CEO Markus Jooste..Although tax can be used as a blunt weapon, there are much smarter ways of achieving the ultimate intention, which, for any society so afflicted, is addressing extreme inequalities. But it requires the surgeon's scalpel rather than a meat cleaver. Capital is cowardly. Spring a surprise and it will run away – faster now than ever before given our interconnected world. Patience and small steps work better. Like the frog that boils to death as you slowly raise the temperature, small but continuous adjustments achieve the same objective. Without unnecessary ructions..Achieving this balance has been part of the genius of the democratic South African Government's financial management. There was the quick win of a 5% "transitional levy" in 1995 paid by all earning over R50 000. But that was only the start of a veritable raft of Wealth Taxes quietly introduced in the years since. Never called that, of course. But having the same effect anyway..In essence, there are only two types of Wealth Taxes. The most popular because it is easiest to monitor, is transaction-based where tax is due when an asset changes hands. Which, in effect, is when you sell something owned for a while, when is when you die or make a gift. Best known of these is Capital Gains Tax, introduced in 2001. With only the first R17 500 exempt, it's clearly targeted at the better heeled. Brilliantly constructed and marketed in a way that the population finds it palatable, CGT has been kept at a maximum effective rate of 10% in South Africa..The other well known transaction-based tax is Estate Duty. Also since 2001, 20% of the net asset value of any deceased South African accrues to the State. The first R3.5m is exempt. So it's pretty clear who is being targeted. In case you hadn't noticed, that 20% must be paid after everything in the estate is totted up at today's market values – and Capital Gains Tax levied on the difference between the original cost. Closing out the Wealth Tax loop is Donations Tax. Again, the first R100 000 a year is exempt, but thereafter an additional 20% must be paid to the State over an above the value of any gift. Mercifully, spouses are excluded..Some hotheads want to go further still and nationalize a percentage of every rich citizen's net assets. South Africa has occasionally flirted with such a Net Wealth Tax, but common sense has always prevailed. It is an administrative nightmare mainly because of the difficulty in valuing illiquid assets like private businesses, arts or antiques; and the way even liquid assets fluctuate. Where it has been enforced (in some Swiss cantons a 0.3% annual rate is charged) the cost of administration is almost as much as the revenue generated..Despite its obvious popularity among voters, such practical realities are the prime reason why no developing country has gone this route. Given the South African Government's sensible approach to financial matters, it's unlikely this is the country, which will break the mould. Which will come as some relief for a middle class who doubtless feel they're already burdened with enough "Wealth Tax". Including hidden ones like paying for schooling, private security, medical insurance and transport because of the poor quality of alternatives offered by the State.

Thinkpiece: What the Wealth Tax call means for South Africans

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