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Inequality: Is tax the right tool?

27 October 2014   (0 Comments)
Posted by: Author: Gillian Jones
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Author: Gillian Jones (Financial Mail)

The wealthiest 10% of SA’s population owns over two-thirds of the country’s assets, which places it among the most unequal in the world.

Inequality is a global issue. The bottom half of the global population owns less than 1% of total wealth, according to Credit Suisse’s fifth annual wealth report, released last week.

In sharp contrast, the richest decile holds 87% of the world’s wealth, and the top 1% owns almost half of all global assets.

Since inequality is thought to feed social unrest, experts are examining the role the SA tax system could play in reducing the gap.

The growing global debate about wealth inequality, fuelled in part by French economist Thomas Piketty’s book Capital in the Twenty-First Century, spurred Credit Suisse to explore the issue in its latest report.

SA was found to fall into the "very high inequality" category, alongside Brazil, India, Indonesia, Turkey and Russia.

Inequality is caused by a combination of factors, though their relative importance and actual effect are not well understood, says Credit Suisse private banking and wealth management division MD Michael O’Sullivan.

The economic growth rate, demographic trends, savings behaviour and macroeconomic trends like globalisation all play a role in the level and distribution of wealth in a country over long periods. Government policies, including taxation and pension provision, can also influence inequality.

Stiaan Klue, CEO of the SA Institute of Tax Professionals, says the ANC is already using tax as a political tool to redistribute wealth. "Even before it came into power it pressed for radical reform of taxation and saw tax as a fiscal policy and political tool to correct historical wrongs," he says.

The ANC government has introduced various wealth taxes, including capital gains tax, Klue points out. It has also transformed the SA Revenue Service into a leading tax authority.

Earlier this month, finance minister Nhlanhla Nene said treasury was considering broadening the SA tax base to cut the budget deficit.

Klue says that doing this by increasing Vat would not be politically feasible, while raising the corporate tax rate would discourage investment, so government will continue adding to the stealth taxes instead, with the likes of carbon tax, reformed estate duties and a second-tier Vat rate for luxury goods.

Indirect taxes, such as levies on fuel, plastic bags and tyre recycling, will continue to be a focus, he says.

"A separate Vat tier, which is a form of wealth tax and in line with [the findings of] Piketty, is coming, either in this mini budget or next year," says Klue.

The majority of SA’s household wealth – 73% – is made up of financial assets‚ which include shares‚ cash and bonds, according to Credit Suisse.

"A country where the top 10% own 70% of the wealth is defined as unequal, and SA has consistently been around the levels of 69%-73%," says O’Sullivan. "In emerging markets, as a country develops, inequality normally rises; but then the middle class grows and inequality reverses. But in SA this hasn’t happened."

Azar Jammine, director and chief economist of Econometrix, says inequality in SA is influenced by the structure of the financial sector, which is exploited to make money by those who understand it, while the financially illiterate do not benefit.

In the past few years, markets have performed well largely because of the huge increase in liquidity as a result of quantitative easing programmes.

"This was intended to boost economic activity but in fact most of the liquidity has gone towards pushing up asset prices rather than creating jobs and real economic activity," says Jammine.

"Those with pension and provident funds or unit trust or direct investment in the share market have done well, while the majority has been left behind."

SA’s inequality is also a result of improving corporate governance, Jammine says.

Remuneration committees refer pay increases for executives to a remuneration agency which, based on its data, recommends an increase in line with industry trends.

However, with each increase granted, the average is raised higher.

"There is upward bias or creep in executive remuneration, coupled with share options, so executives are making a lot of money while the man in the street gets only an inflation-plus increase," Jammine says.

He proposes changing the mix of the tax system to increase tax on wealth while reducing tax on income, but not increasing the overall tax burden.

"This would give a greater incentive to work harder and generate more income, which is needed for productivity," he says.

The value of SA’s financial assets — including provident and pension funds, estimated to be around R7 trillion, and personal real estate, estimated to be around R4 trillion — adds up to about R12 trillion.

If government levied 0,1% on that total, it would earn about R12bn in tax revenue, says Jammine.

"I think if you did it this way, it would reduce the incentive to make a lot of money out of share schemes rather than through hard work."

Jammine says it would probably penalise the ultra-wealthy a little more. "But is that not what we want to do? Because then the poor start seeing an effort to redistribute income."

Klue says, however, that instead of increasing tax, SA should rather focus on more effectively spending its taxes, particularly on education, while increasing productivity.

This article first appeared on financialmail.co.za.


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