TAX AS A WEAPON FOR GOOD?
Tax is universally hated and yet virtually universally applied. This article considers tax as a weapon for good, to address income and wealth inequality, and some of the more innovative ways this could be applied in the upcoming Budget Speech and associated legislative cycle.
Income and wealth inequality: taxation as a solution
‘[T]o an unusually large extent in the U.S., economic disparities between individuals reflect the luck of one’s birth and systemic discrimination, not hard work.’ These are the words of Batchelder and Kamin, in a paper titled Taxing the Rich: Issues and Options, issued on 11 September 2019 (available at SSRN). The paper considers various options for taxing the wealthy, with one of the main reasons being the very high levels of income and wealth inequality, which are also heavily skewed by race. When reading this discussion, one feels that one might as well be reading about South Africa, where the very same issues exist.
Similarly, the OECD released their report on wealth taxes in 2018, reporting on a renewed interest throughout OECD countries in net wealth taxes as a way to raise taxes and reduce wealth inequality.
South African context
Within South Africa, addressing income and wealth inequality is naturally a serious issue. There is also great concern over National Health Insurance, including how to fund this through new or increased taxes. Finally, with years of budget deficits and spiraling debt, a combination of fiscal discipline in government spending and increased tax revenues would be necessary to restore financial stability.
‘Income inequality tax’: Taxing the pay gap
In the United States, Senator Bernie Sanders has proposed an ‘income inequality tax’ on companies with large pay gaps between executives and the average worker at the company. This plan proposes a 0.5% increase in corporate tax where the CEO (or highest paid employee, if not the CEO) earns at least 50 times the salary of the median worker, increasing 0.5% for each additional 50 times the median worker salary earned by the CEO. This is capped at a maximum 5% increase for companies whose CEO earns 500 times what the median worker earns.
If this plan comes in, the treasury department would issue regulations to prevent tax avoidance, for example changing the composition of a firm’s workforce, and pay ratio data would be public. While the plan would raise very significant revenues, with the intention of eliminating USD 81 billion in medical debt, its main purpose according to Bernie Sanders’ website is to send a message to corporate America: ‘stop paying your workers inadequate wages while CEOs make outrageous compensation package’.
Addressing gaps in inheritance taxes
Batchelder and Kamin highlight that there are so many exemptions and the tax base is so porous that inheritance tax in the United States is highly ineffective. There are various ways in which this situation is similar in South Africa:
- The use of trusts to avoid estate duty: Because assets within trusts are generally not subject to estate duty, trusts can be used for so-called ‘generation skipping’. In certain other countries, a small annual asset tax on trusts is used to mitigate this effect. For example, a 0.5% asset tax per year for 50 years would equate to a 25% estate duty.
- Tax emigration to avoid estate duty: Although tax emigration from South Africa would trigger an ‘exit tax’ (capital gains tax on deemed disposal of assets), this only relates to taxable capital gains, not potential estate duty. It is possible for individuals to emigrate from South Africa late in their lives, relocating to a jurisdiction where there is no estate duty, as a mechanism to escape estate duties. Imposing an ‘exit tax’ on wealth on a sliding scale based on age, and not only on capital gains, could address this.
Closing these types of ‘loopholes’ that allow the wealthy to effectively pay less tax than the average citizen, help to promote equality.
Other tax types
Other tax types that could be considered, that would be more progressive:
- Tax on ‘supercars’ (such as the 10% extra tax on supercars in China).
- Financial transaction taxes. Currently, securities transfer tax is a transaction tax. There does not appear to be a compelling reason why certain commodities like shares should be taxed in this manner, and not other similar financial transactions involving derivatives, debt instruments, or even cryptocurrency. Some cryptocurrency industry participants have, in fact, suggested a ‘higher than normal’ financial transaction tax (say 6%, as opposed to the current securities transfer tax rate of 0.25%) on all cryptocurrency transactions implemented on a South African exchange, combined with an exemption from capital gains tax on these transactions. This is seen as a means to boost tax revenue collection, and encourage South Africa as a destination for cryptocurrency transactions.
The advantage of these types of tax, as opposed to a more conventional ‘wealth tax’, is that the tax event is associated with a liquidity event, rather than taxing wealth where there may be no ‘cash’ available to settle the tax.
Traditional ‘wealth tax’ has many drawbacks. In contrast, other taxing measures that are more innovative can work towards reducing inequality, while raising tax revenues in a manageable way.