A recent survey shows that nearly two-thirds of South Africans agree with the idea of taxing the wealthy at higher rates to fund government initiatives that benefit the impoverished, particularly those aimed at supporting the youth. This information comes from the latest Afrobarometer survey, conducted by the Institute for Justice and Reconciliation (IJR) and Plus 94 Research, which interviewed 1,600 South African adults, providing a 95% confidence level of representativeness.

1. A majority of South Africans support taxing the wealthy at higher rates to fund government programs aimed at benefiting the poor and the youth, according to a recent Afrobarometer survey.
2. The proposed wealth tax could generate significant revenue, potentially addressing wealth inequality and expanding the government’s fiscal base; however, economists warn of challenges such as difficulties in execution, economic damage, and limited revenue generation.
3. Despite public support for wealth redistribution, the government must carefully weigh the potential negative consequences to maintain a balance between wealth redistribution and economic stability.

The Wealth Gap in South Africa

The survey does not provide a clear definition of “wealthy,” but it was conducted in light of a recent study by the Southern Centre for Inequality Studies at the University of the Witwatersrand. This study found that a mere 3,500 individuals hold 15% of the country’s wealth, with the top 1% owning 55%. It also revealed that 50% of South Africans live from hand to mouth, having little to no savings cushion.

The IJR points out that while some argue that taxes for the most affluent are already high enough, others view the implementation of a progressive wealth tax as a viable policy measure to address extreme wealth inequality and to expand the government’s revenue base, ensuring fiscal sustainability.

Potential Impact of a Wealth Tax

According to the IJR, a wealth tax could generate between R70 billion and R160 billion per year, equivalent to 1.5% to 3.5% of the nation’s GDP. The Afrobarometer survey data reveals that the majority of South Africans support this idea.

Regarding tax fairness, approximately two-thirds (64%) of respondents believe it is fair for the rich to pay higher taxes than ordinary citizens to help fund government programs for the poor, while 27% disagreed. Around one-third (32%) feel that wealthy South Africans are already paying the right amount of tax, and another third (34%) believe they should pay more. A significant 40% think that ordinary South Africans are paying too much tax.

Interestingly, only 39% of respondents agreed that the government should require small traders and others in the informal sector to pay taxes on their businesses.

Public Support for Expanding Tax Base

Given the widespread unemployment and gross inequality in South Africa, these findings suggest public support for the government to consider new ways to expand the tax base, finance its development agenda, and address urgent socio-economic needs.

In 2022, the Department of Social Development conducted a study which concluded that transforming the current social relief distress (SRD) grant into a permanent basic income grant is possible if personal income taxes (PIT) on the wealthy are increased to fund it. The study found that PIT hikes on the wealthy were the best option and characterized as “highly distributive.”

Priorities for Tax Revenue

Of those who supported higher taxes on the wealthy, 70% indicated that the tax revenue generated should be spent on programs for the youth, while only 21% opposed this view. If the government were to increase spending on such initiatives, job creation (53%) would be the top priority for additional investment, followed by education (23%).

Challenges of Implementing a Wealth Tax

Despite its populist appeal, a wealth tax faces several challenges, including execution difficulties, potential economic damage, and limited revenue generation, warn economists.

Hugo Pienaar, an economist at the Bureau for Economic Research, notes that there are only 133,000 super-wealthy South Africans with a taxable income of over R1.5 million. He argues that attempting to raise R45 billion for basic income grants from this small group would require an exorbitantly high tax rate, potentially prompting many wealthy individuals to leave South Africa and relocate their businesses to more tax -friendly countries.

Eunomix chief economist Claude de Baissac shares this concern, noting that South Africa is experiencing a growth collapse and is overly reliant on tax revenue from wealthy citizens, who are increasingly leaving the country. Data from New World Wealth and Henley & Partners indicates that around 4,500 high-net-worth individuals (HNWIs) have left South Africa over the past decade, and a wealth tax could exacerbate this trend.

As of the beginning of 2023, the National Treasury revealed that 29 million South Africans receive grants, with only 7.4 million taxpayers. This includes 18 million citizens receiving state welfare grants and 11 million depending on the state’s R350 grant.

“We are the only African country giving almost half its population grants. No other country in Africa takes care of its people as we do in South Africa,” President Ramaphosa stated.

Increasing Grants and the Economic Consequences

Instead of reducing the number of grant recipients, the ruling party aims to provide more people with larger grants. This is evident in the recent proposal to increase the SRD grant from R350 to a minimum of R413, with a plan to progressively raise the grant until it reaches the current food poverty line of R663.

While President Ramaphosa celebrates the millions of grant recipients, economists caution that this creates an unsustainable economic situation. Ann Bernstein, executive director of the Centre for Development and Enterprise (CDE), warns that the government’s finances are already unsustainable, and introducing a large, permanent new spending program will only worsen the situation.

Bernstein emphasizes that there is a high price for higher taxes, including slower economic growth and reduced employment opportunities. “The slowdown in growth will make the rest of the government’s spending even less affordable than it is now, and the consequences will be terrible for the poor,” she said.

Balancing Wealth Redistribution and Economic Stability

As South Africa grapples with extreme wealth inequality and the need to finance government programs, the debate around implementing a wealth tax continues. While many South Africans support the idea of taxing the rich more to support the poor and fund initiatives for the youth, economists warn of the potential negative consequences. The government must carefully weigh these considerations to strike a balance between wealth redistribution and maintaining economic stability.