This week’s News Flash does not include much on current affairs, focusing instead on the highly topical and contentious subject of taxing wealthy individuals. As we show in our headline article for the week, a wealth tax is not a new (nor a necessarily good) idea, but it is one that has gained traction in recent years. The economists, Joseph E. Stiglitz and Thomas Piketty, are among the most passionate advocates for wealth taxes as a way to level the playing fields and address inequality, going as far as to argue that billionaires should be taxed out of existence.
Right now, The Tax Foundation highlights just five OECD countries with a net wealth tax:
- Colombia – 1% applied to net wealth in excess of COP 5 billion (US $1.4 million).
- France – 5% percent to 1.5% net taxable wealth in real estate properties above €800,000
- Norway – 7 percent at the municipality level and 0.15 percent at the national level for wealth above NOK 1.5 million ($180,000) for unmarried taxpayers, and NOK 3 million ($360,000) for married couples
- Spain – up to 3.75% subject to various exemptions. Adjustments may also be made by the Autonomous Regions
- Switzerland – wealth taxes are raised at cantonal and municipal level, with no federal wealth tax. Rates usually range between 0.1% to a maximum of 1% of net assets.
However, the debate is growing about whether the wealthy are paying enough tax in countries such as Canada, the UK, Peru, South Africa, and in the US at both a federal and state level. As the world tries to rebuild after the coronavirus crisis, we can expect to see this debate become more heated in the months to come.
“Congress can raise taxes because it can persuade a sizable fraction of the populace that somebody else will pay.”
– Milton Friedman, an American economist
- Wealth tax in the US: Although many developed countries choose to tax wealth, the United States has historically favoured taxing income. Recently, however, the immense and increasing disparity in wealth in the United States – as of 2018 the wealthiest 10% owned 70% of the country’s wealth while the richest 1% owned 32%, according to Federal Reserve Board – caused politicians such as Bernie Sanders and Elizabeth Warren to propose the introduction of a wealth tax.
- In the UK, the Office for National Statistics reported that in 2018, the wealthiest 10% had aggregate net wealth of £6.5tn, just over 300% of Gross Domestic Product (GDP). A 1% net wealth tax on the richest 10% would theoretically yield revenues equivalent to 3% of GDP. However, the diversification of UK wealth across asset classes complicates the implementation of a tax on the richest decile, with just 21.5% of their wealth in directly held financial assets and a further 43.7% in pensions. The inclusion of assets held offshore, particularly in tax havens, would probably produce much greater levels of taxable wealth, but also additional complexity in tax collection.
- In Australia, the Covid-19 pandemic has illuminated the wealth disparity problem with the combined wealth of Australian billionaires rising by more than 52% from December 2019 to December 2020. House prices have reached record levels and stock markets have been catapulted to new heights, bringing good fortune to those holding such assets. By comparison, regular families have experienced stagnant wages, unemployment, continued low levels of home ownership and increasing debt. Based on the above, it is easy to mount an argument for taxing the rich more based on fairness grounds. However, notions of ‘fairness’, ‘rich’ or ‘wealthy’ are challenging because of their subjectivity and there is no widely accepted view on what is fair or who is rich or wealthy. Australia has a progressive income tax system and taxes capital gains, although the latter are taxed concessionally in many instances.
- Market News: Markets retracted heavily in March last year due to the initial lock downs put in place to curb the spread of Covid-19. Since then, however, markets have soared, gaining over 70% since their March lows. Could this reversal, the largest ever seen, be a red flag? Many traditionalists, including Warren Buffet and Charlie Munger, continue to think that there is a disconnect between the economy and the stock market, and this could be a potential “bubble” ready to pop.
- Structured Products: Investec’s British arm says it will stop offering retail clients the type of structured products that contributed to a sharp decline in the bank’s profitability and could leave it with nearly R4bn in hedging costs. The bank said on Wednesday that it would not launch any further retail structured product plans after the current series closes on April 1. The products, which it had been offering in the UK since 2008, were caught on the wrong side of the volatility that engulfed global markets as the spread of Covid-19 led to lockdowns in key markets in March 2020.
- As we approach the Budget Speech scheduled for 24 February, voices in favour of the introduction of a new wealth tax are becoming louder. In this article compiled by Dynasty, we acknowledge that addressing the huge disparity in wealth across our population is one of the country’s greatest and most pressing challenges. However, we provide reasons why this should be addressed by means other than through a wealth tax. We also believe that a wealth tax would be a complex mechanism for raising revenues compared to other levers that Treasury can pull.
- The rand continues to strengthen against the dollar – R14.66 at the time of writing. We agree with the views expressed in this article by Alison Barker, an economist at Analytics Consulting FX Solutions, in that there are currently a number of positive factors supporting the rand, the majority of which are not South African specific. However, the more medium and longer-term domestic factors remain most concerning, and any global shock could also be a catalyst for a reversal of fortune. Although the currency could continue to appreciate in the short-term, the current exchange rate provides an opportunity to continue with externalisation strategies.
- Moody’s issued South Africa with a warning of not getting complacent ahead of February’s Budget Speech. Lucie Villa, Moody’s senior credit officer, said that “SA’s credit profile is increasingly constrained by strong, widespread fiscal pressures, including rising borrowing costs and persistently low growth.”
- According to the latest data from the United Nations, Ramaphosa’s investment drive that he set out in 2018 to have $100 billion in new investments over five years, is far from its goal three years into the initiative. The cumulative total over the past three years amounts to $12.5 billion in new investment.
- Gold smugglers have been using South Africa as a transit route to and from Dubai. Dubai authorities have started clamping down and are looking at ways to tackle the problem of bringing illicit forms of the precious metal into the country. In the latest arrests, three suspects travelling from Madagascar on their way to Dubai were detained at OR International Airport at the start of the year after gold bars weighing 73.5kg, and worth about R67.5 million were allegedly discovered in their hand luggage.
Sources: Dynasty, Reuters, Bloomberg Markets, The New York Times, Daily Maverick, and Moneyweb, etc