This blog has two goals: (1) to argue that wealth taxes have a negative impact on trade and investment; and (2) to offer an alternative that can ensure sustainable development for the Global South. Drawing on literature from the IMF, OECD and various academic institutions, we argue that increasing taxation on wealth would likely have a negative impact on trade and investment in Africa. We begin by reviewing the empirical evidence on the effects of wealth taxes and conclude by looking at how wealth taxes would affect South Africa, one of the continent’s most important economies.
The effects of wealth taxes
Despite the growing popularity of wealth taxes, several countries have repealed such taxes in the recent past. In 1996, 12 OECD countries were generating revenue from wealth taxes; by 2022, that number had fallen to four. This decrease alone suggests significant negative consequences from such policies.
Evidence supports the existence of such consequences. A 2010 study demonstrated that wealth taxes dampen economic growth, while in 2021 researchers found evidence of significant tax evasion in Colombia despite a government-designed programme that incentivised wealthy Colombians to declare previously hidden wealth. The latter study shows that weakly institutionalised governments may lack the de facto power to enforce a wealth tax even if they pass such a law. Another piece of evidence is provided by researchers in a 1999 review, which found that when two countries have similar economic and political conditions, their tax policies may become determining factors in where foreign direct investment (FDI) ends up being allocated.
For countries in the Global South that are desperate to attract FDI and integrate into lucrative global value chains, wealth taxes will likely have the effect of keeping international investors away. Take, for example, Burundi’s recent decision to create special economic zones (SEZs) with the explicit intention of attracting FDI. Such zones offer tax incentives to companies and simplified regulatory procedures for private sector activity. However, the institution of a wealth tax by the Burundi government would make potential investors reconsider setting up business in there, rather looking to other countries where SEZs operate but wealth taxes are absent.
South Africa
A brief analysis of South Africa’s economy demonstrates why adopting a wealth tax may be unwise. Firstly, South Africa has seen weak growth for over a decade now, with the economy typically growing below 2% annually. The economy has pretty much stalled, growing by an abysmal 0.7% in 2023. FDI inflows have also fallen dangerously low. FDI as a percentage of GDP dropped to 2.3% and 0.9% in 2022 and 2023 respectively. If South Africa even hints at the possibility of a more unfavourable tax regime, investors may look elsewhere and these numbers will fall further.
Secondly, South Africa is already losing high-net-worth individuals, and implementing a wealth tax will make the situation worse. In January, it was reported that 38 000 wealthy South Africans had left the country since 2024, causing a loss in tax revenue of approximately $160 million. Such exits are becoming normal for South Africa, which also lost a reported $500 million in investable wealth during 2024 – again, due to the perception that it is not friendly to business. This is in line with findings from a 2024 study of European economies that showed that wealthy individuals often emigrate from countries that impose wealth taxes.
These developments are not surprising. Wealth taxes are an attempt to extract money from some of the most mobile individuals in the world. The list of economists, and even Nobel Prize winners, who recognise that such individuals are often utility-maximisers includes Buchanan and Tullock (1962), Olson (1965) and Ostrom (1990).
Instead of going down the wealth tax route, South Africa (and other countries in the Global South) should focus on economic freedom instead: building inclusive economic institutions that protect the rule of law, enforce contracts and encourage private sector-led growth. A 2017 article found that economic freedom is important for South Africa’s growth. Such findings fit with a 2016 study that found that economic freedom enhances the impact of FDI on economic growth, while a 2021 study found that economic freedom generally has positive effects in African countries.
In summary, the available evidence on the impact of wealth taxes in South Africa, the greater African region and beyond should give policymakers pause if they wish to promote trade and investment.
Commentary
A case against wealth taxes and suggestions for alternatives
South Africa and other Global South countries should prioritise economic freedom by establishing institutions that uphold the rule of law and promote private sector growth.
This blog has two goals: (1) to argue that wealth taxes have a negative impact on trade and investment; and (2) to offer an alternative that can ensure sustainable development for the Global South. Drawing on literature from the IMF, OECD and various academic institutions, we argue that increasing taxation on wealth would likely have a negative impact on trade and investment in Africa. We begin by reviewing the empirical evidence on the effects of wealth taxes and conclude by looking at how wealth taxes would affect South Africa, one of the continent’s most important economies.
The effects of wealth taxes
Despite the growing popularity of wealth taxes, several countries have repealed such taxes in the recent past. In 1996, 12 OECD countries were generating revenue from wealth taxes; by 2022, that number had fallen to four. This decrease alone suggests significant negative consequences from such policies.
Evidence supports the existence of such consequences. A 2010 study demonstrated that wealth taxes dampen economic growth, while in 2021 researchers found evidence of significant tax evasion in Colombia despite a government-designed programme that incentivised wealthy Colombians to declare previously hidden wealth. The latter study shows that weakly institutionalised governments may lack the de facto power to enforce a wealth tax even if they pass such a law. Another piece of evidence is provided by researchers in a 1999 review, which found that when two countries have similar economic and political conditions, their tax policies may become determining factors in where foreign direct investment (FDI) ends up being allocated.
For countries in the Global South that are desperate to attract FDI and integrate into lucrative global value chains, wealth taxes will likely have the effect of keeping international investors away. Take, for example, Burundi’s recent decision to create special economic zones (SEZs) with the explicit intention of attracting FDI. Such zones offer tax incentives to companies and simplified regulatory procedures for private sector activity. However, the institution of a wealth tax by the Burundi government would make potential investors reconsider setting up business in there, rather looking to other countries where SEZs operate but wealth taxes are absent.
South Africa
A brief analysis of South Africa’s economy demonstrates why adopting a wealth tax may be unwise. Firstly, South Africa has seen weak growth for over a decade now, with the economy typically growing below 2% annually. The economy has pretty much stalled, growing by an abysmal 0.7% in 2023. FDI inflows have also fallen dangerously low. FDI as a percentage of GDP dropped to 2.3% and 0.9% in 2022 and 2023 respectively. If South Africa even hints at the possibility of a more unfavourable tax regime, investors may look elsewhere and these numbers will fall further.
Secondly, South Africa is already losing high-net-worth individuals, and implementing a wealth tax will make the situation worse. In January, it was reported that 38 000 wealthy South Africans had left the country since 2024, causing a loss in tax revenue of approximately $160 million. Such exits are becoming normal for South Africa, which also lost a reported $500 million in investable wealth during 2024 – again, due to the perception that it is not friendly to business. This is in line with findings from a 2024 study of European economies that showed that wealthy individuals often emigrate from countries that impose wealth taxes.
These developments are not surprising. Wealth taxes are an attempt to extract money from some of the most mobile individuals in the world. The list of economists, and even Nobel Prize winners, who recognise that such individuals are often utility-maximisers includes Buchanan and Tullock (1962), Olson (1965) and Ostrom (1990).
Instead of going down the wealth tax route, South Africa (and other countries in the Global South) should focus on economic freedom instead: building inclusive economic institutions that protect the rule of law, enforce contracts and encourage private sector-led growth. A 2017 article found that economic freedom is important for South Africa’s growth. Such findings fit with a 2016 study that found that economic freedom enhances the impact of FDI on economic growth, while a 2021 study found that economic freedom generally has positive effects in African countries.
In summary, the available evidence on the impact of wealth taxes in South Africa, the greater African region and beyond should give policymakers pause if they wish to promote trade and investment.
* The views expressed in T20 blog posts are those of the author/s.
4 Sep 2025
Task Force
Keywords
Author/s
More articles
From digital dependence to digital sovereignty: South Africa’s G20 opportunity in the age of AI
As G20 president, South Africa can highlight the importance of digital sovereignty for ensuring dignity, economic justice, and resilience.
Unlocking e-commerce for MSMEs: A global digital adoption programme for inclusive growth
G20 policymakers should prioritise investing in digital capability rather than just another platform. By enhancing people's skills, the G20 can promote shared prosperity across all regions, not just the most connected ones.
Synergies for sustainability: Fast-tracking SDG achievements with a green digital skills toolkit
The ‘green digital skills toolkit’ will equip individuals and sectors with the skills needed for the sustainable use of digital technologies as G20 countries navigate digital and climate transitions.