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What CEOs think of Piketty’s wealth tax plan for SA

06 October 2015   (0 Comments)
Posted by: Authors: Rob Rose and Claire Bisseker
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Authors: Rob Rose and Claire Bisseker (Financial Mail)

Thomas Piketty, the 44-year-old French economist whose book Capital in the Twenty-First Century has defied precedent and expectations by roaring to the top of the New York Times bestseller list, has some radical ideas about what SA ought to do to loosen the choke-hold of inequality..

For instance, answering a series of questions from the Financial Mail, Piketty says SA should "introduce an annual progressive tax on net individual capital wealth, first with relatively low tax rates, so as to better monitor the evolution of wealth."

He says SA needs a triple-pronged tax system: a progressive inheritance tax; a progressive wealth tax; and progressive income tax.

"We need all of them, we should not choose between them," he said.

Free-market proponents typically have a visceral distaste for this sort of "wealth tax" — a recurrent theme in Piketty’s book, which has sold 2,5m copies worldwide, making it easily and perhaps implausibly, the best-selling economics textbook in the modern age.

Piketty says that in a modern economy such as SA, people should consider this kind of wealth tax as a "sort of permanent land reform", while also taking aim at the lack of transparency of its financial system, adding that without better insight into income and wealth, "it is impossible to have a proper democratic debate".

"SA is one the most unequal countries in the world. This stems obviously from the apartheid legacy, but also from the ‘neoliberal’ pro-market and pro-rich policies that have dominated the world, including SA, since the 1980s-1990s."

In his book, Piketty emphatically rejects any ideological hankering for communism.

His proposals, however, are unlikely to win him friends in SA boardrooms.

Richemont chairman Johann Rupert, for example, says: "What happens if people say ‘hang on, I’m not incentivised to create jobs and produce wealth?’ That’s where this book fails to provide a real solution."

Though welcoming the book’s contribution to the debate on inequality, a similarly cautious tone is struck by Phuthuma Nhleko, who built the pan-African cellular giant MTN, of which he is now the chairman, Shoprite chairman Christo Wiese, and others.

Yet, while much as the world’s corporate elite is predictably reluctant to embrace any wealth tax, it is a notion that has gained currency since his book appeared in English last year.

In fact, Piketty’s status as a "rock star economist" has been attested to by none other than the Financial Times, which said his thesis of rising inequality "tapped into the zeitgeist and electrified the post-financial- crisis public policy debate". The Economist magazine, in a review titled "Bigger than Marx", declared that the book was "the closest thing to a pop-culture sensation heavyweight economics will ever provide". Former US treasury secretary Larry Summers wrote in The Atlantic magazine that Piketty’s book "richly deserves all the attention it is getting", adding that his painstaking research had "transformed political discourse and is a Nobel prize-winning contribution". Paul Krugman, himself the winner of a Nobel prize for economics, goes further, saying in The New York Review of Books that "Piketty has transformed our economic discourse — we’ll never talk about wealth and inequality the same way we used to".

Even late-night TV show host Stephen Colbert proudly brandishes a T-shirt emblazoned with Piketty’s central equation: r > g, where "r" is the return on capital (including dividends, profits, rents), and "g" stands for economic growth (see box on the book’s main contention, on page 22).

But Picketty’s treatise discomfits many in the executive suite. One thing that rankles is the close association with the thinking of Karl Marx — not least his book’s title, which echoes Marx’s iconic socialist tome, Das Kapital. The symbolism isn’t lost on anyone. Naspers chairman Koos Bekker, for example, says he hasn’t read Piketty's work, "though I confess I did read Das Kapital."

However, Piketty is not as hostile to market forces as some may think. Nor does he believe that if his ideas were to be implemented (which he concedes is unlikely), the world would find itself in a socialist utopia with zero inequality.

"I belong to a generation that came of age listening to news of the collapse of the communist dictatorships, and never felt the slightest affection or nostalgia for those regimes or for the Soviet Union," he says. "I was vaccinated for life against the conventional but lazy rhetoric of anti-capitalism, some of which simply ignored the historic failure of communism."

Piketty has "no interest in denouncing inequality or capitalism per se, especially since social inequalities are not in themselves a problem as long as they are justified."

Why then, if inequality is an ineluctable part of capitalism, does his argument matter? Why bother trying to reduce it?

Well, for one thing, Piketty argues that rampant income inequality hampers a country’s growth, and says you can’t simply rely on market forces to stabilise inequality at "an acceptable level". Instead, you need policy interventions to address it.

Piketty was born in 1971 and came to adulthood as the Berlin Wall fell and apartheid’s death knell began to sound. The historical context seems to have given him a surprisingly strong empathy with SA. His book opens with a retelling of the Marikana massacre and delves into the history of taxation in this country, to illustrate his thesis on the expansion of global inequality under capitalism.

It is no accident that SA became an appropriate proxy for his argument.

"For everybody in my generation, SA has a universal significance. When I was a teenager, my parents told me that (former US president) Ronald Reagan refused sanctions against the apartheid regime because America was racist," he told the Financial Mail.

Of course, France has had its own share of race problems, and became one of the worst colonial powers. For example, when Haitian slaves revolted at the end of the 18th century, France imposed an enormous debt which Haiti had to repay until the mid-20th century. Such power dynamics, well known to most South Africans, inform Piketty’s sensibility on inequality, which many describe as of a particular European vintage.

"Each country has its own intimate history with inequality and power, full of self-serving statements and rulings by the elites, but also full of promise and hope," he says. This means he understands the need for specific economic interventions such as black economic empowerment (BEE) to rebalance the economy.

Discussing empowerment, Piketty says it’s difficult to get a handle on whether BEE has worked or not because "there is not enough transparency about wealth and capital ownership in SA". For example, he says that while there are strong reasons to believe wealth concentration is "very high" in SA, precisely how high is impossible to ascertain without real transparency on who owns the wealth.

"It is very difficult to access inheritance tax statistics, and since there is no annual wealth tax, there is no reliable information on the wealth of the living. As a consequence, we know very little about wealth inequality in SA," says Piketty.

This means it is unclear whether BEE has worked or not — or whether it needs a greater push.

"It is quite possible that policies such as BEE at market prices are not sufficient to significantly reduce wealth concentration in a high-inequality country such as SA, and that it needs to be supplemented by direct redistribution."

This is in itself a radical thought that should cause politicians to prick up their ears, as the full impact of the policy is now being debated, especially in mining.

SA’s top businessmen have also largely welcomed the book — even if they’re a lot more cautious of Piketty’s policy fixes.

MTN’s Nhleko devoured all 700 pages of Capital. which he describes as a "taxing" but "sterling piece of academic work".

"Piketty’s book was a tour de force. It was most enlightening in many respects, not least his key contention that there is huge empirical evidence that low GDP growth and high return earned by capital simply increases the concentration of wealth."

Bobby Godsell, the chair of Business Leadership SA and former CEO of Anglo- Gold Ashanti, describes it as a "major work".

"For me, perhaps the most important insight was that global growth rates in the next few decades are likely to be significantly lower than those experienced since the end of World War 2," he says.

But Godsell isn’t quite so sure if Piketty’s criticism of the lack of transparency over wealth taxes is accurate when it comes to this country. "I think the system is well-designed and Sars does a very good job in ensuring broad compliance," he says.

A year after the book’s release, this sums up a broader consensus that even Piketty himself concedes: it is far from the last word on the subject. If anything, it’s a curtain raiser to spark thought on the subject.

While many South Africans have received his book warmly, CEOs and businessmen have been less enthusiastic about the idea of a "wealth tax" — one of the cornerstone policies advocated by Piketty.

He hasn’t softened his stance, despite criticism from former Bank of England governor Mervyn King, who wrote in the UK’s The Telegraph that Piketty’s conclusions "may excite the well-heeled intellectual salons of Paris and New York, but most of us recognise that a market economy has served us well by creating growth and reducing poverty."

But, Piketty says: "If it is properly administered and calibrated, a progressive wealth tax can raise economic mobility and efficiency. It is also highly complementary with policies such as BEE."

Those with a lot of accumulated wealth would only be required to return a fraction of it to society "to alleviate the tax burden on lower socioeconomic groups and to allow newcomers to enter wealth accumulation," Piketty says.

In a country like SA, widely considered one of the most unequal in the world (measured by the Gini coefficient), this will be music to the ears of the ANC’s alliance partners, Cosatu and the SA Communist Party. But whether government is listening isn’t clear.

The Financial Mail understands that national treasury has actually modelled the impact of a wealth tax. But its conclusions were that it would raise far too little money to plug the holes in the fiscus.

Interestingly, no politicians or policymakers have asked to meet Piketty. "Of course I am open for meetings and discussions," he says.

The country’s CEOs might be even less inclined to sit down with him and debate his ideas. Rupert, one of SA’s three richest people, is one of those who has pored over the book. "It’s heavy, it’s not a weekend read. We all know what the problem is, with deep inequality, but the solution is somewhat more complex," he says.

But one thing Rupert is clear about is that a wealth tax is no solution. "In my case, I give away my salary every year to charity and I put 130 kids through university every year. If I have a wealth tax, I’ll have a lot less to donate. I give away far more than anyone would collect through a wealth tax."

Recently, one pundit reckoned that if Rupert’s fortune were divided among every South African, they’d each get US$500. "How far would $500 go? It wouldn’t put those 130 children through university for a single year," he says.

This doesn’t mean Rupert has a tin ear for the wealth chasm. "I’ve said before that it’s not fair that a fraction of 1% of the population should take the spoils. The real question is how to change this."

The problem with a wealth tax, Rupert says, is it transfers cash to the state, which then has to decide how to use that money. "I can understand why people want it, but governments worldwide haven’t really been as effective in using capital as the private sector has. So, if you have a wealth tax and everyone feels better about creating a fairer system, what do you do next year when that capital hasn’t made much of a difference?"

To Rupert, Piketty’s proposed wealth tax misses the point. "What we’ve got to concentrate on is, first, job creation, and second, education. Unless we educate people and create jobs, inequality will get worse."

Piketty does, however, stress the importance of education and skills in addressing inequality. In answer to questions from the Financial Mail he says: "In the long run, the diffusion of knowledge, inclusive educational investment and labour market institutions are equally important to reduce inequality."

It’s just that Piketty would supplement that with other interventions — which many top businessmen think are unnecessary.

Wiese, now SA’s richest man since Glencore’s fall from grace profoundly dislodged Ivan Glasenberg from the apex, says radical solutions to address inequality are as old as the problem itself. "The thing is, the arithmetic tells you that simply taking from some to give to the others doesn’t solve the problem. The real answer is self-evident, and that’s to do everything in our power to create growth in the economy."

To do this, of course, you need policies that encourage growth.

Wiese says you can’t eradicate inequality, you can only mitigate its effects. "People always forget that all taxes are paid by the end-consumer of a product — everyone else is just a transmission agent. Taxing luxury items, perhaps that’s fine because the people who buy those things have lots of money, but a wealth tax just doesn’t work."

Godsell also does not believe there is a "compelling case" for a brand-new tax. He points out that the tax South Africans already pay — income from investments and income tax — is "on the high side". Instead, he says, reducing poverty by creating more jobs and improving skills is the quickest way to slash inequality.

Nhleko says that, in principle, it’s hard to argue against the morality of a progressive tax but a lot trickier in practice.

"If the use of the proceeds of progressive tax collected does not go to creating conducive investment conditions that ensure that your tax base actually increases, it eventually defeats the long-term purpose."

Rather, Nhleko favours a simpler, lower, flat tax rate that is easily monitored, alongside stringent accountability for government spending.

"If merely a high progressive tax rate was the panacea for our ills, then France would be the model society in attracting investment, achieving high GDP growth and limiting social ills. It is not, which strongly suggests that the matter is far more complex than levying a progressive tax on capital accumulation."

acko Maree, the former CEO of Standard Bank and deputy chair of Business Leadership SA, says that though Piketty’s theory has been attacked, "the fact that it became so popular means there is clearly some sympathy for the view that the world economy has become more unfair."

But Maree says it might be a different proposition if the wealthy "had confidence that the money would be used well".

"If governments were to adopt a well-constructed effort to raise money for x, y or z, there might be some sympathy for it" — but a general new wealth tax with no specific goal in mind would have less chance of flying.

Reuel Khoza, former Nedbank chairman and a lecturer at the Wits Business School, warns that, in principle, "I’m concerned that what this guy is proposing might dampen the spirit of enterprise. Whatever you do when it comes to taxation, it shouldn’t cross the threshold where people say: ‘What’s the point’."

Rather than a wealth tax, SA’s corporate sector believes the solution lies in government putting in place the kinds of policies that would encourage the country to grow its way out of inequality. This means jettisoning silly visa regulations of the kind which have gutted tourism this year, and dealing decisively with the electricity supply crunch and the fractious labour environment.

In a discussion paper on Piketty released at the recent Economics Society of SA conference, Prof Raymond Parsons of North West University’s Business School asks a simple but provocative question: what if we concentrate on "g" (growth) instead?

Parsons considers what SA’s chances are of avoiding Piketty’s dystopian vision of ever-widening inequalities by looking at Piketty’s equation (r > g) through the opposite end of the telescope.

He deduces that fixing the root causes of inequality in SA requires repairing the root causes of low growth. Essentially, it requires making the economic growth rate (g) bigger than the rate of return on capital (r).

In his book, Piketty recognises "it is perfectly possible to imagine a society in which the growth rate (g) is greater than the return on capital (r)". He cites the example of a developing country where productivity growth is rapidly catching up with more technologically advanced countries.

Says Parsons: "Piketty’s approach broadly supports the view that rapid economic growth has a recognised capacity to address widespread poverty and eventually, inequality. The lesson for SA is that the slower the economy grows, the longer these problems persist, and the more difficult they are to manage."

What, then, are the implications for tax policy? Should SA tax income more lightly and wealth more heavily to underpin society’ socioeconomic goals?

This is an important point because it is clear that the Davis Tax Committee (DTC), under the chairmanship of Judge Dennis Davis, is relying heavily on Piketty’s thinking. Its proposal to increase the revenue raised by SA’s inheritance tax tenfold is partly thanks to Piketty, who is referenced a number of times in the committee’s paper on this subject.

It’s something of a tightrope, however. If more rapid, job-intensive growth is SA’s overarching strategy for dealing with widespread poverty — essentially, if the goal is to make (g) > (r) — then surely tax policy should not unnecessarily hamper capital accumulation on which investment and job-creation depend?

Parsons acknowledges that taxation is, above all, a political matter.

"There is no simple technocratic solution to the dilemmas of tax reform. There will need to be trade-offs," he says.

"What new or higher taxes are to be levied, on whom and at what rates, are among the most important decisions the ANC government will face once the tax committee has made its final recommendations."

What’s clear is that, as with the Davis committee, Piketty’s ideas have influenced those tasked with drawing up tax policies. This is perhaps surprising, given the glut of critics who have leapt out of the woodwork in a rush to debunk everything Piketty has said.

For example, Joseph Stiglitz, Nobel laureate economics professor at Columbia University, disagrees with Piketty’s prediction that inequality will keep rising in the absence of severe intervention.

"The problem may not be with how markets should or do work, but with our political system, which has failed to ensure that markets are competitive, and has designed rules that sustain distorted markets in which corporations and the rich can (and unfortunately do) exploit everyone else," says Stiglitz.

Instead, he suggests that a few small changes — higher capital gains tax, greater spending on education and governance reforms on executive pay — would help reduce inequality.

Equally, Sanlam chief economist Jac Laubscher believes a large chunk of Capital’s popularity is probably due to confirmation bias: in other words, people gravitate to writings that support their own preconceived biases.

"It is likely that a significant number of the 2,5m people that have bought a copy of Capital have not read all of its approximately 600 pages of rather dense prose. It is even more unlikely that many of them have immersed themselves in the secondary literature that has sprung up in response to Capital, much of it critical of Piketty’s conclusions," he says.

In particular, two academics from Harvard and the Massachusetts Institute of Technology, Daron Acemoglu and James Robinson, published a paper a few months ago, taking issue with his findings as they applied to SA.

They argue that Piketty largely ignored the social and political institutions shaping the dynamics of a country’s economy, focusing slavishly on his two pet numbers — r and g — as if they existed in a vacuum. "The turning points in inequality in SA in fact have institutional and political roots ... no clear consensus has yet emerged on the causes of the post-apartheid increase in inequality," they contend.

Piketty hit back at their criticisms in a paper in the Journal of Economic Perspectives, saying some of his concepts had been "garbled" in the feverish discussion about the book. "Given my strong emphasis on how institutions and public policies shape the dynamics of income and wealth inequality, it is somewhat surprising that Acemoglu and Robinson argue ... that I neglect the role of institutions," he says.

And it does seem true that Capital repeatedly refers to these institutions. For example, it states explicitly upfront that the "distribution of wealth has always been deeply political, and it cannot be reduced to purely economic mechanisms".

But in his reflection, Piketty concedes: "I may have devoted too much attention to progressive capital taxation and too little attention to a number of institutional evolutions that could prove equally important — such as the development of alternative forms of property arrangements and participatory governance."

Perhaps surprised by the whirlwind his book has created, Piketty says it should be seen as "at best, an introduction to the study of capital in the 21st century". In part, he says, this is because all the gaps in the data for wealth and income make it exceptionally difficult to reach definitive findings.

Nonetheless, Piketty’s ambitious tome has struck a chord — even if its findings remain contested, and its thesis becomes more complete as the gaps in its conclusions on income inequality are slowly filled.

But, as Summers says, "books that represent the last word on a topic are important. Books that represent one of the first words are even more important".

For SA’s policymakers, grappling with how interventionist an approach to take, it may not be the magic solution to firing up growth in a near-static economy, but it is nonetheless valuable ammunition in the broader fight against inequality.

This article first appeared on financialmail.co.za.


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