We have an issue on our hands.

On the 8th of November, Christopher Axelson, The National Treasury’s acting head of Tax and Financial Sector Policy, took questions from the joint meeting of the Standing and Select Committees on Finance. He confirmed that the Treasury are indeed considering a wealth tax.

This looks like a big maybe, but it is in fact a slow-moving train with no breaks on. Axelson confirmed that, in the implementation of the coming net wealth tax, they will be using the Davis Tax Committee as a frame of reference. Axelson confirms that the department will be directly following their recommendations.

The government is headed for a policy which may wipe out the savings and preservation of intergenerational wealth of the vast majority of society capable of accumulating any by legal means, and open up these individuals’ assets to a firesale on the international market for corporate investors.

This will likely impact farmers hardest, since the size of the assets they must hold in order to earn even a meager living are quite large in absolute terms. This is a challenge currently being faced in the UK, where a government advisor has openly admitted that their intention is to liquidate them as a class, that the society “can do without them”.

The trouble is, the DA are not pushing back at all, and have been dead silent.

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The Davis Tax Committee

So what is this report the Treasury is so in thrall to, and who are the people who have been writing our government’s policy for them?

In 2018, the Davis Tax Committee’s Wealth Tax Report was compiled by Ingrid Woolard, the dean of Stellenbosch’s economics department, and the late tax accountant Matthew Lester, both of whose priority focus in their professions have been on maximising wealth redistribution as a universal fix-all for every social ill, and not always in particularly subtle ways.

The DTC itself is headed by Marxist judge and UCT lecturer Dennis Davis, and includes Deborah Tickle, who has worked for the notoriously corrupt consulting group KPMG for 31 years, a company which helped the Gupta family evade taxes and hide corruption for 15 years.

Their terms of reference are to promote “inclusive growth, employment creation, development and fiscal sustainability”. Buzzwords, mainly, but the first term there effectively means wealth redistricution, or more idiomatically, that there shall be no growth that is not inclusive - poverty is better than inequality.

Woolard’s academic work consists entirely in obsessively measuring inequality, a pathological search for the most acutely pity- and resentment-inducing frames she can find, to justify levelling policies, whether they have sound economic justifications or not. She is also a supporter of the widely disproven economic theory that unconditional cash transfers (i.e., universal basic income-type policies) stimulate economic development.

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The report

In a way, the 2018 report was Lester’s lifeswork - he died shortly after it was published. The report in question opens with the following dedication to the levelling of society, and the strange notion that wealth redistribution is the source of economic growth:

Wealth inequality in South Africa is extremely high and poses a threat to social stability and inclusive growth. It is timely for South Africa to consider a range of ways in which wealth inequality can be reduced.

It is in this context that the Minister of Finance asked the Committee to consider the feasibility of introducing a net wealth tax. The Helen Suzman Foundation helpfully provides a summary of the findings by this body, if you don’t want to pick through such a long pdf.

The report draws on the work of Marxist economist Thomas Piketty, whose thesis is that wealth creation is generally based on rent-seeking behaviour, and is extractive and exploitative in nature, and therefore unearned, as is any form of inheritance.

The report focuses on a diminishing return on savings as a result of chronic inflation, and warns, that a wealth tax would further disincentivise saving in the general population. On the other hand, it said that excluding retirement funds from a wealth tax would render it relatively ineffective, since retirement funds are where a quarter of the nation’s private wealth lies, and with increasing life expectancies, this pot of money is likely to diminish further.

SARS has already taken a windfall from retirement savings by encouraging people to spend their pension savings through the two-pot system, and any further squeezing would likely exhaust this pool.

And yet, after acknowledging all of this, the report outlines what it considers as excessive leniency and generosity on the part of the state - the numerous tax concessions afforded to retirement funds since 2001, such as exemptions from capital gains and estate duties, are recognised as playing a critical role in supporting retirement savings.

Overall, South Africa has a rubbish wealth-to-income ratio in general, markedly lower than that of wealthier nations. The report remarks that even many high-income countries abandoned wealth taxes due to low returns, making it improbable that South Africa could achieve meaningful revenue from such a tax.

They go on to remark that there is a legitimate fear of capital flight, which the country is already struggling to reign in (albeit at a lower level). The wealthy would clearly wish to pull their money out of the country.

The outflows the DTC expect could have cascading effects, such as forcing the government to issue more foreign-denominated bonds, increasing exchange rate risks, and threatening South Africa’s credit rating. A potential downgrade could trigger further, corporate capital flight, depreciate the rand, and worsen inflation generating a vicious cycle of economic liquidation.

On the other hand, the report claims wealth tax would “support redistribution”. You don’t say.

The report follows with the accurate assertion that accurate wealth measurement and international tax cooperation are prerequisites, suggesting that we need not worry, these are far away.

Yet both of these are already being iomplemented. The DTC report recommended first gathering more data on the extent of present wealth before considering the precise nature of the wealth tax to come. SARS already now has a special unit for scrutinising individuals with net assets over R50 million, requiring them to declare their wealth in more detail, allowing SARS to assess the distribution of wealth in the country.

And the international escapes for capital are closing down.

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International tax cooperation

As the report suggests, taxing returns on wealth is not enough to reduce inequality, and won’t extract enough money. Meanwhile, international cooperation is essential, or else the economy will fall into a death-spiral of capital flight, inflation and asset liquidation.

Lucky for them, the government is not doing this alone. What Axelson highlighted in his answers last week is that this is precisely what the government are heading towards - harmonising the tax system with Europe’s, through the Global Minimum Tax Bill, and providing an audit of the top layer of the country by income.

The bill itself does literally only one thing - directly implement the recommendations from the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting. This framework aims to stop corporations from using tax arbitrage to escape paying top rates in the countries they operate in.

But this does not stop at corporate income tax - the OECD’s framework is much more comprehensive, and in April of 2018, the organisation released a very similar document to that issued by Lester and Woolard at the DTC the previous month. The arguments and reference points are largely the same, though the frame of reference is naturally global rather than local.

But they both refer to Thomas Piketty, and see the policy instrument fundamentally as a levelling instrument, not a revenue-generating one, pointing out that wealth taxes generally don’t contribute that much to national revenue. They both blame this latter phenomenon on a failure to be more stringent in auditing and extracting wealth.

And both utter sentiments to the effect that:

‍“it may be argued that wealth begets more power, which may ultimately beget more wealth. Overall, this means that, in the absence of taxation, wealth inequality will tend to increase [...] inheritances constitute an unearned advantage for recipients”

This report, written by Sarah Perret, who works both for the OECD and the EU, has publicly framed this policy work as an attempt to use the lockdowns as a policy window for initiating global tax reforms.

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Silence is compliance

It is not hard to see why the DA have been quiet on this issue, even if it might break the back of our local economy. In fact, under Mmusi Maimane, the wealth tax became a headline policy of the party (Songezo Zibi has also backed the wealth taxes, for what it’s worth). The DA, while they are cautious about proposing additional taxes, promise the sorts of things that can only be afforded (according to present analysis) by the extra taxes proposed here.

To whit, Dion Goerge’s proposal for a R1 500 universal basic income, which is DA official policy.

But the reason for the DA's silence is not hard to intuit, if one knows how to parse the language of veiled threats. Deloitte issued a public statement on the 30th of October gently cautioning the DA, by suggesting that their historical disagreements with the ANC over tax increases cause uncertainty, and the global investment markets hate uncertainty.

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Global Mugabenomics?

Axelson’s emphasis on the DTC report reveals a narrow and desperate approach. South Africa has largely maxed out its tax base, and any more squeezing, as they say, will likely result in capital flight.

But with tax harmonisation, that fear is reduced. The never-ending cycle of increased public spending, edging inexorably towards Soviet conditions, can only be done at a global or hemispheric scale.

The graph above exhibits a general trend all democracies exhibit, with rare exceptions like Argentina. I say rare, I mean, Argentina is the only example in history of the trend being significantly reversed by democratic means). There is a reason the financial establishment conspired to destroy hapless UK Prime Minister Liz Truss - we are heading towards a common global tax regime within the Western sphere of influence, and any rebellion - i.e., "austerity", is now anathema.

Zimbabwe’s attempt to speed-run this trend from 1980 until 2005 has resulted in the permanent shattering of its society. Mugabe brought on board generous welfare, which they could not afford on their tax base. So they borrowed the money. Then this proved to be too much to pay off, so they get an IMF bailout. The bailout comes with structural adjustment conditions - cut welfare, pay the debt.

But they can’t cut spending because they rely on patronage, as in fact, all political systems do, regardless of what naive liberals may pretend. The competition for power rests on the patronage of donor/contractor businesses, civil servants, state-dependent voters, and ultimately, the military.

So Mugabe chose to print away the debt, and when the currency became too weak to pay his cronies, he carved up everyone’s assets for them.

The West is of course, much more sophisticated. They have done money printing, debt restructuring, borrowing and tax maximisation in various layers over several decades, and have harmonised these policies since 2008, in an effort to cope with the end of easy growth in the global economy.

Attempts to squeeze more out of the economy since 08 have all fallen flat - money printing, extra taxes, borrowing, all have had ambiguous and often negative effects on Western economies.

But with the UK now openly liquidating its farmers to open up the countryside for global corporate development. They plan to use England’s green and pleasant land for housing migrants, wind farms, etc - the Netherlands wanted to do this too, but have had their notions of a Benelux megacity stymied after the farmers’ protests, as they hoped to use crucial regulations to make the cost of business higher than the benefit of selling out. America has seen the cronies of the US government like Gates, BlackRock and Vanguard scoop up massive quantities of housing and farmland as the outgoing regime liquidated the real economy.

Attempts at wealth taxes collapsed in the 2000s, because it creates capital flight. But with a captive market, you can force people to liquidate their property by making it too expensive to own.

You only take people’s houses and farms when you’re entering the final phase of the democratic cycle.

Trump may be the last gasp of fresh air in the West. But Ramaphosa is already choking us in carbon monoxide, and the DA are not handing out oxygen masks.

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