Mutant Tax

Mutant Tax

Only one country in all of Africa can join Elizabeth Warren’s debate about a wealth tax: South Africa.

And in earnest. In just the last few years America’s fiscal situation has grown surprisingly aligned with South Africa’s. Probably because of the pandemic, but certainly because of globalization. Since South Africa’s politics have presaged ours for the last decade, it’s worth looking at what’s going on there.

A “wealth tax” is immediate, patent redistribution of wealth. A generation ago it was called communistic. Now, dubbing it socialistic is the euphemistic defense currently used by conservatives. But because “socialism” has been so twisted and redefined in America’s current politics responding to that defense isn’t very useful.

What Elizabeth Warren means by promoting her wealth tax is a simple flat percentage on individual wealth in excess of $50 million. She’s starting with 2%.

South Africans are still grappling with a variety of proposals made as early as a decade ago of between 3-7% on incomes greater than $100,000. Since South Africa’s GDP per capita is about a tenth of America’s, South Africa’s wealth tax proposals would have a much greater impact on its wealthy than America’s.

But because South Africa’s wealth disparity (percentage of the population and actual levels of wealth compared to those in poorer groups) is greater than America’s, the proposals being discussed in both countries would roughly generate about the same level of benefit, i.e. new revenue.

The arguments in both countries for the tax are roughly the same:

  1. A wealth tax is fixed, not progressive.
  2. A wealth tax forces the government to determine the wealth of individuals leading to better statistics.
  3. The massive benefits earned can in one fell stroke eliminate enormous disparity.
  4. The tax is a single event tax, not a recurring one.

The arguments against the tax are also similar in both our countries.

  1. & 2. are combined in the argument that the determination of individual wealth is biased.
  2. The benefits, such as reducing student debt, don’t fix the problem.
  3. The tax will not be a one-off assessment but will become recurring.

“Trickle down economics” as an argument against taxing the rich seems to have gone by the wayside in both countries, as it should. So the past generational arguments that greater wealth at the top will ultimately seep down to greater wealth below has been pretty much discarded.

It seems to be recognized by both societies that income inequality is bad. That’s rather new and a great step forward.

Getting into the arguments pro and con is complicated and lengthy, and if interested you ought to pursue it yourself. This blog isn’t going to do so. This blog is to let us in America know what could happen here to Sen. Warren’s proposal by understanding the already played out politics of South Africa, which is several years ahead of us.

The person in charge of proposing South Africa’s 2017 budget (in 2016) was the Minister of Finance, Pravin Gordhan, an accomplished financial wizard who was a famous anti-apartheid activist.

He started out just like Elizabeth Warren is starting out, now, but once in government committees and legislatures it became one of the most complex tax laws ever enacted in a democratic world:

By April of 2017 this simple single tax on a certain level of wealth had become a complicated additional tax bracket with a cabinet of loopholes. Alas, democracy working capitalism.

But the government prevailed and the much maligned notion of a “wealth tax” survived all sorts of revisions and became law.

Guess what. It didn’t work so well. Everything from projections of revenue to the actual collection of the tax were embarrassingly wrong.

So South African “wealth tax” advocates are now back to square one. This four-year setback does not now bode well for any future “wealth tax,” since it more or less failed so badly the first time around.

Lesson-that-better-be-learned: Stick to the original idea. It’s a good one because it’s a simple one. If it ceases to be simple, it loses its value altogether. Don’t replicate South Africa.