It’s estimated that a 1% wealth tax would generate revenue of about R70 billion. Adelzadeh said the tax should be based on the wealthiest household’s net wealth in terms of income and assets
South Africa’s top income earners should pay a wealth tax to fund the basic income grant (BIG) and help take millions of South Africans out of poverty. That’s according to the Institute for Economic Justice (IEJ) and the Applied Development Research Solutions, who have modelled how the BIG could be financed.
At a webinar on Tuesday, Dr Asghar Adelzadeh, the co-director of the Economic Modelling Academy at GIBS Business School, presented three ways of funding the BIG through a 1% wealth tax on the country’s top income earners, who hold up to 90% of the country’s wealth. It’s estimated that a 1% wealth tax would generate revenue of about R70 billion. Adelzadeh said the tax should be based on the wealthiest household’s net wealth in terms of income and assets.
Other proposed ways of funding the BIG would use a social security tax and an increase in VAT.
Social security tax is a simple structure that applies a flat social security tax to people’s wages/salaries up to a taxable maximum of 2.5%.
“It’s a simple approach that can be further developed to include; it’s just indicative in the sense of showing that it is possible to also fund the BIG as soon as possible. That is done to the wage income of the individuals, and looking at the eligibility that is then adopted and provided to the social security programme by the employees.
“The combination of an increase in VAT revenue and this increased introduction of a half-percent and 1% wealth tax allows them to finance the growth cost of the scenario,” he added.
READ: Living below the poverty line: Who should die of poverty?
The models looked at scenarios of the BIG and the variation between the poverty line, food poverty and upper poverty line over time as a basis of support and the impact on economic growth, unemployment rate and reduction of poverty and inequality levels.
The different scenarios talk to the slow introduction of a BIG starting at 60% of those eligible through a means test to adults between the ages of 18 and 59 over eight years. Receiving the BIG, Adelzadeh says, should be excluded from receiving any other adult grants. He adds:
The introduction of the BIG is not 100% takeoff; [we propose a] slow takeoff starting at 60% during the first year and gradually increasing it by 20% by 2030. We estimate that 81% of those eligible would have applied and received the BIG.
Entitlement conditions differ in terms of people’s monthly payment. It’s no different, as we use different poverty lines to identify the initial level of violence and how it evolves over the years. And all plans adjust to inflation.
READ: Poverty at worst level yet, but a basic income grant is unaffordable – CDE
This comes as the debate continues about whether the country can afford the BIG. Those who have vehemently opposed it have argued that the country simply cannot afford it. Some have said the BIG could cost between R200 billion and R300 billion a year, depending on the number of beneficiaries.
With the precarious financial conditions of the country, Treasury has been reluctant to continue with the social relief of distress grant known as the R350 grant introduced to mitigate the impact of the Covid-19 pandemic. The grant that was meant to be a temporary measure has been extended to 2025; however, given the poverty levels in the country, coupled with an economy that’s just not growing and high unemployment levels, it’s difficult to see how this could be ended without causing an uproar.
The IEJ has now taken government to challenge the exclusion of some unemployed individuals from receiving the R350 grant based on the current means test.
READ: Jashwin Baijoo | South Africa must tread very carefully on wealth tax
Dr Gilad Isaacs, executive director at the IEJ, said the doomsday comments regarding the BIG were made when there were talks about introducing a minimum wage.
Impact on growth
Adelzadeh said while there were many constraints to the domestic economy, the BIG could help increase aggregate demand. He added at a basic level, the BIG could boost the GDP growth rate to an average of about 2.22%.
The average annual unemployment rate over the next eight years would be about 32.1%. The annual CPI and interest rates and the current account deficit to GDP ratio would be about 3.8%, 6.9% and -4.3%, respectively
Isaacs stated that the impact of social transfers on growth may have not been pronounced because grant increases over the years have either kept pace with or grown below inflation.
“We haven’t seen an increase in existing grants and, therefore, are losing value. One can’t extrapolate from what the macro-economic impact might be.
“The second thing is that there are differing propensities to consume in the economy. And we know for a fact that lower-income households have a higher propensity to consume than the upper-income class. We know that a fair share of wealth stored is also moved offshore,” he said.
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