Business 5.6.2017 07:42 am

Wealth taxes are just plain stupid

An illustration of wealth tax. File photo

An illustration of wealth tax. File photo

How to change wealth distribution without another tax.

The Davis Commission is investigating new wealth taxes , mostly motivated by the tried and trusted inequality refrain. In a recent speech, the Minister of Finance also quoted from an Oxfam report which states that only three people have the wealth of the bottom 50% of the population.

The question has to be how South Africa compares to the rest of the world and what should the country be doing about it.

Well, the Oxfam report is mostly based on the Credit Suisse wealth report and here some facts in the report that the minister and Oxfam did not make public.

South Africa has a more equal wealth distribution than Denmark (89.7) and Sweden (83.3), the United States and the world average. The World Gini is 92.7. SA stands at 83, while even Norway is at 80 for example.

Yes, significant inequality exists in South Africa. We have the 32nd most unequal wealth distribution in the world, which mirrors what is seen in many other countries.  At least 20 more countries fall within 3 points of our wealth Gini co-efficient.

There is only one country with a wealth Gini below 50 and wealth is far less equally distributed than income. This is partly due to fewer older folk benefiting from compounding of investment returns and the low long term success rate of business.

Moreover, South African per capita wealth has declined in US dollar terms over the last five years and the trend seems to be ongoing.  South Africa median wealth was in the top half of countries ten years ago and we have slipped to the 92nd spot. Despite this, we remain one of the highest emerging market countries as far as the typical person is concerned.

So perhaps South Africa should not aim to only redistribute the wealth, but also how we can growth wealth.

Taxing wealth does not distribute it well as the Swedish and Danish examples show. In fact government should let the notion go that wealth must be more fairely distributed.

How to fix the South African wealth distribution.

Wealth is made up of two main assets: Housing and financial assets.  These two assets are can actually be distributed without raising a single extra cent of tax.

Housing in South Africa is already very widely distributed. About 63% of households own their own home. This places South Africa in the top 40 countries as regards homeownership rates measured after 2010.

Then a further 14% of households stay in government housing ownership which can be transferred to them. This alone would increase homeownership to about 77%.

As the Director General of Agriculture recently stated, the African farmers only get access to land but not the title deeds. It then prohibits those farmers to full title and real finance. It also says that Government does to trust these farmers but complains about unequal land distribution . This represents about 4000 farmers; equal to 10% of commercial farmers.

Furthermore, households who live in traditional areas represent about 8% of all households. They generally only have a Permission To Occupy (PTO). This system should be changed and they should receive full ownership via a title deed.

This is even the case with president Jacob Zuma. He doesn’t own a title deed for his Nkandla homestead. He has received permission from king Goodwill Zwelethini to live there and it is one of the reasons why he battled to get a loan from a bank against the property.

This means that without any additional costs or expenses, SA’s home ownership rate can jump to 85%. This would revitalise many areas economies all over South Africa and have huge knock-on effects in rural areas.

The 85% homeownership would move SA homeownership from the top 40 into the top 10 countries!

Moreover, South Africa already has probably the highest ownership of second homes in the world as fully 22% of all African households claim to have a 2nd home.

Perhaps SA could even transfer plots in informal settlements to strengthen those communities too. Again, only administrative costs would have to be incurred. Combining the above could put SA into the top three homeownership rates in the world!

Financial assets are spread better than survey data suggests.

Significant changes in the  distribution of financial assets are also visible.  The recent Intellidex report states that Black Economic empowerment within the top 100 JSE listed companies in 2015 was valued at R350 billion.

If this amount was viewed as pension assets, it would be the 10th largest pension fund in the emerging country universe of about 60 countries. The average value per adult in the labour force alone would be three times the average of the rest of the emerging market per labour force wealth!

After Nigeria and South Africa the total BEE asset value is as big as the next three African Countries pension funds combined.

More than 11.4 million people are beneficiaries of these BEE companies. It rises to at least 11.8 million if the beneficiaries of community projects are also included. This may represent as much as 60% of all households in the country.

If these beneficiaries were changed to shareholders, it would take one stroke with the administrative pen to change the wealth distribution of financial assets in the country.

These proposals will improve SA’s wealth gini cooficient. That was the purpose of BEE and it seems as if benefiaries are not aware of the wealth they have amassed, as they do not actually own it.

The one aspect of BEE that has never worked is the way in which thousands of companies tried to spread wealth. Despite the high costs and effort to implement BEE and to transfer wealth, it has failed as the beneficiaries did not receive the wealth.

It is therefore not surprising that most people see BEE as a failure, as only a few people – and often the same people – benefitted.

This must be fixed with laws, but not taxes. Taxes will only distribute to government – not to the people.

Again this would be an administrative requirement. You get cheap shares for your union members you must then make them shareholders and not ad hoc beneficiaries.

Change the taxes to make employee ownership easier and encouraged. That would also spread the wealth further and increase ownership and probably productivity. This could help at least 10% of households become owners of financial assets they did not have before.

Another option is to list state owned companies and give every current SA citizen shares. This will also spread the wealth far more equally than before.

Administrative changes will therefore be much more effective to transfer wealth. Wealth taxes are just plain stupid. It will not redistribute wealth and reduce ecomomic growth.

The Gini is a method of looking at the equality or inequality of a country. The rate is between 0 and 1 with 1 being the most unequal with 1 person have all the income or wealth. The world wealth GINI is 92% and the world income Gini is 72%. Wealth refers generally to financial savings (investments) and houses with some including assets like cars. Income refers to the pay or income one receives from work or from investments.

The Wealth Gini by its compounded nature tends to be the more unequal of the two Gini’s.

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