“The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries” (Winston Churchill)
Thomas Piketty has become a global “rock star” economist following the release of his book “Capital in the Twenty First Century”. In the book he argued that the wealthy are getting wealthier, and to reduce this growing inequality he proposed a global wealth tax.
It is well known that South Africa is one of the most unequal societies in the world and thus there was widespread interest in his opinions on our local inequality.
Information on wealth in South Africa
In Western societies there is considerable data on wealth but in South Africa there is little information on wealth. This is because wealth taxes (estate duty, donations tax and transfer duty) account for only 1% of taxes collected. Also with our uneven past and present, much of the nation’s wealth is hidden.
Piketty has made his name as a researcher mainly on wealth and thus faced considerable obstacles when making expert recommendations to South Africans.
How should we reduce inequality in SA?
Piketty had plenty to say, beginning with stating that inequality had risen markedly since the new government came to power in 1994. A 2014 World Bank survey on South African inequality seems to contradict this. Social expenditure on the country’s disadvantaged communities (social grants, pensions, health care, education) had reduced inequality by nearly 25% – the Gini Coefficient (the globally accepted measurement on inequality in which 1 is completely unequal and the closer the index gets to zero, the more equal a society is) – had declined from 0.77 to 0.59 as a result of these interventions. Piketty appears to have overlooked this.
Some of his other statements did make sense – in South Africa the top 10% of earners receive nearly 65% of the income. In Brazil this is closer to 55% and it is 35% in Europe. What he did not say (but the World Bank Survey did) is that tax in South Africa is one of the largest redistributors of income – the top 10% of our earners pay 87% of personal income tax and 60% of VAT. One of his often-cited recommendations is to make tax more progressive but South Africa has already gone a long way down this road.
This implies that other initiatives such as education reform (to be fair Piketty did call for improved education), improving job creation and access to the labour market should be the ones to focus on to reduce inequality.
The proposed wealth tax
Finally, despite accepting that there is little data on wealth, Piketty is in favour of a low wealth tax which can then be evaluated and adjusted depending on the data that emerged from the proposed wealth tax. As taxes have many consequences, this is something that should be carefully weighed up if it is going to be implemented.
Interestingly there is one piece of research done on wealth in South Africa. It tracks the ratio of private to GDP (Gross Domestic Product) from the 1970s. The ratio is constant at 240-260% of GDP. One of Piketty’s best known pieces of research is that in first world countries this was 600-800% of GDP at the beginning of the last century and dropped to 200-300% in the 1970s but is now at 400-700%. This was used to justify his proposal for higher income taxes and a wealth tax. It is difficult to justify a wealth tax when our ratio is approximately one third that of the first world.
As wealth taxes only contribute 1% of the total tax collected, one would question how much impact a wealth tax would actually have. Even increasing current wealth taxes by 300% will only result in this tax contributing 4% of the tax take.
Inequality is a major issue and Piketty’s ideas may not be implemented here but he has nevertheless rekindled an important debate.
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)