What if the Wealth Tax backfires?

Written on 11/07/2022
Sandra Laurence

Even if we assume Government’s plan for a wealth tax is honourable, Garth Zietsman, a statistician who writes for the Free Market Foundation, believes it’s very unlikely to result in long-term wealth increases for the poor, or long-term wealth redistribution. R143 billion is a tiny fraction of the amount needed to even start the process of wealth equalisation – even if government taxed wealth in such a way that all adults ended up with equal wealth after redistribution, the level of wealth gained by the poor would be pitiful. And Zietsman argues that if history is any guide, they are almost certain to lose that new wealth within a generation. Also, the prospect of a tax on the wealth generated by investment is likely to discourage investment. There is already an exodus of high tax- paying individuals on the go, and a wealth tax will certainly speed it up. Surely this is not the way to go? – Sandra Laurence

The folly of a wealth tax

By Garth Zietsman*

Government is proposing a tax on the wealth of the richest 1% of individuals (354,000 of them), at rates of 3-7% of wealth above R3.6 million. They expect to easily collect it (because the number of people is small, and the required information is already available) and to raise R143 billion.

The architects justify the tax on the grounds that we need it to start equalizing the wealth across the country. I doubt that government will use it to equalize wealth at all. I am confident that already wealthy politicians, and those with political connections, will end up using it to further enrich themselves instead. Still, even if we assume the plan is honourable, a wealth tax is very unlikely to result in long term wealth increases for the poor, or long-term wealth redistribution. 

R143 billion is a tiny fraction of the amount needed to even start the process of wealth equalisation. Even if government taxes wealth in such a way that all adults end up with equal wealth after redistribution, the level of wealth gained by the poor would be pitiful. If history is any guide, then they are almost certain to lose that new wealth within a generation. For example, there were eight land lotteries in the US state of Georgia between 1805 and 1833. Follow-up studies showed that the poor who were lucky enough to win land did little to benefit themselves or their families with their newfound wealth, other than use it to increase consumption. Few retained it after one generation.

An approach much more likely to increase the wealth of the poor is to improve their productivity. Many things contribute to their productivity, eg, their skills, their ability to trade those skills and labour, capital investment, the overall entrepreneurial and technical innovation environment they are embedded in. Note that the last three depend to considerable extent on those whose wealth government intends to tax. If it ends up annoying them enough to leave, it is likely to backfire and worsen the wealth of the poor. 

Those who do not go will respond by diverting resources toward professionals who can help them evade the tax, thereby wasting investment and diverting professionals from productive activities.

The architects of this wealth tax plan defend it by claiming that it will not discourage employment because it will make the fiscus more sustainable, and that in turn both spares the vulnerable while the economy recovers from Covid and attracts more investment. A more sustainable fiscus would attract more investment but the prospect of a tax on the wealth generated by investment is likely to discourage investment. There is already an exodus of high tax paying individuals on the go, and a wealth tax will certainly speed it up, with a resulting shrinkage of an already small tax base. Their expected 30% evasion rate supports this view. The result will be a less sustainable fiscus and less employment.

Then there is the question of whether a wealth tax has any long-term sustainability. Some elite economists think it would, at best, be a one-off effort.

That aside, if government is determined to fund wealth gains, they would raise much more money by reducing size and/or privatizing government owned enterprises. The government also owns a great deal of land. The wealth of the poor – at least in the short term – would improve immediately if government parcelled that land out to the poor, in the form of title deeds.

  • Garth Zietsman is a statistician who analyses and writes for the Free Market Foundation. The views expressed in the article are the author’s and not necessarily shared by the members of the Foundation.

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