The first brief provided a conceptual framework for wealth taxes, the second dealt with the rationale and the third discussed the problems. The fourth and fifth briefs dealt with international experiences with wealth taxes and the seventh discusses lessons for South Africa.
In April 2017, the Davis Tax Committee (DTC), established by the Minister of Finance in 2013, called on the public for written submissions on possible wealth taxes for South Africa. The DTC noted that South Africa currently has three forms of wealth transfer tax, namely estate duty, transfer duty and donations tax, which combined bring in about 1% of total government revenue. The DTC called on public submissions on the desirability and feasibility of the following possible wealth taxes:
Annual wealth taxes have been dealt with extensively in the previous five briefs of this six part series, and this brief deals with land and a national tax on property with a focus on the former.
In the beginning of this year the Department of Rural Development and Land Reform released what it called the 2017 Land Audit Report. Within the Report was a proposal for a land tax in order to finance a new land reform fund. Bizarrely, while land tax has been advocated by some of the history’s most celebrated economists, from Adam Smith to Henry George, the Report relied on a 2014 blog post by UK economist Joe Sarling who graduated from university in 2009.
Administered at a national government level, a land tax in its general form is a tax on the unimproved or site value of land and is paid by the owner. Property taxes on the other hand tax both the value of the land and any improvements to it.
Adam Smith called for a tax on land in book five of Wealth of Nations. His rationale was that the rents earned from land “are a species of revenue which the owner, in many cases, enjoys without care or attention of his own” and are “owing to the good government of the sovereign.” He further postulates that “Though part of this revenue should be taken from him to defray the expenses of the state, no discouragement will thereby be given to any sort of industry.”
Henry George, who rose to fame in the United States after publishing Progress and Poverty in 1879, agreed with Adam Smith. George stated that the value of unimproved land is unearned and comes from the demand for a fixed amount of land. Furthermore, because the value of unimproved land is unearned, a tax on the land’s value will not affect productive behaviour. George specifically argues for a “single tax” in this regard. This single tax would be on the unimproved value of land and that this could provide the entire required government revenue. The plausibility of this latter point is beyond the scope of this brief.
However, the value of land is clearly not wholly determined by good government alone. It is also created by improvements in the surrounding land, which is more often effected by private individuals and businesses, rather than government. A tax on the land’s value is really a tax on its productive potential resulting from the improvements to land in the surrounding area. [1]
Some argue that a land tax will:
Unlike many other forms of wealth tax, there is nothing an individual can do to avoid a land tax apart from disposing of the land. A new land tax, which creates an additional liability for owners, reduces the market price of affected land by the expected present value of the taxation stream. Nonetheless, land taxes have their disadvantages. Implementation of a land tax would need to be carefully considered, as the downside risks may outweigh the potential benefits.
Charles Collocott
Researcher
charles.c@hsf.org.za
[1] http://www.econlib.org/library/Enc/bios/George.html
[2] http://www.politicsweb.co.za/documents/why-the-proposed-wealth-taxes-wont-work--irr
[3] World Bank Development Indicators
[3] International Handbook on Land and Property Taxation, Bird and Slack, p33
[4] http://charteredwealth.co.za/effects-proposed-wealth-tax-south-africa/