The University of Cape Town constitutional law expert said in a blog post on Wednesday that South Africa should essentially get rid of inheritance by taxing it at up to 100% to prevent white privilege from being carried over from one generation to the next, thereby tackling inequality.
I came across your piece about the transfer of intergenerational wealth when Max du Preez tweeted a link to it on Wednesday. Any friend of Max’s is a friend of mine, so I read it with great interest. It certainly contains a lot of food for thought and makes an important contribution to a crucial debate.
As a wealth manager responsible for looking after the life savings of a number of South African families, it would however be remiss of me not to offer a counter-perspective.
Let me begin by saying that, like you, I cringed at the glibness of white people “giving up” their white privilege when I saw it a week ago.
I do not come from a wealthy family (my late father was a teacher, my mother sold kitchenware in her spare time at ‘house parties’ to make ends meet), but we always had a roof over our heads in a middle class Johannesburg neighbourhood, there was food on the table three times a day, and we even enjoyed the odd holiday in Amanzimtoti. I also went to decent quality government schools and experienced relatively cheap university education of very decent quality at the old RAU [Rand Afrikaans University, now the University of Johannesburg] in the 1980s.
Compared to my black South African brethren of a similar age, I therefore know and accept that I’ve benefitted from white privilege my whole life.
No amount of hand-wringing or #SJW [social justice warrior] gesturing will ever change that.
Against this background, I sympathise wholeheartedly with your statement that we should consider “practical and concrete steps that could be taken to begin to dismantle the system that produces and reinforces privilege”.
It’s in the detail that I differ from you, however. Before offering an alternative, allow me to respond to your proposal.
In a nutshell, I believe your suggestion of a 100% inheritance tax is ultimately doomed based on at least two points, namely its impact on tax morale, as well as the fact that it just won’t work.
Tax morale – as you no doubt know – can be defined as the intrinsic willingness to pay tax. Contributing to the cost of shared infrastructure and services, for example (some of which one might in fact never use), is supported by a social contract: most people are happy to pay towards having an effective police force and pothole-free roads and clean neighborhoods and a fire department on standby, simply because we all form part of a shared society.
In plain English: people are generally happy to pay their taxes if two conditions are met: as long as rates are not extortionate, and if there is evidence that tax revenues are well spent.
I believe your suggestion of a 100% inheritance tax (after a threshold) fails the former; the latter is a topic for another day.
This brings me to my second point, namely that your suggestion simply won’t work. If there’s no tax morale, in other words, if the ‘haves’ that you’re after believe tax measures to be draconian, they will find ways to avoid it. Books have been written about the difference between tax avoidance and tax evasion, and I don’t want to get into it here – life is too short. Suffice it to say that there is a whole industry of tax and fiduciary advisors that specialise in helping wealthy individuals and families with exactly this.
As part of my accounting training back in the day, I had to serve a two-year sentence of taxation classes at university. My final year lecturer (who consulted to corporate and other clients part-time) used to say she was thankful to have “a partner in government”.
She was referring to the fact that the Tax Act used to change quite a lot on an annual basis, with more watertight rules being written every year in an attempt to close previous loopholes. And of course every time there’s a new rule, creative consultants will find crafty ways of getting around it … hence her reference to a benevolent partner guaranteeing profitable work on a continuous basis.
I believe your proposal – if ever implemented – is bound to suffer the same fate.
The inheritance tax take will probably go down, not up, if you increase the marginal rate to 100%. The richest will leave the country.
They will set up structures. They will find ways of getting assets into the hands of beneficiaries well before death. People like my old university lecturer will be just too glad to help them.
Something else: I think we’re actually having the wrong debate here. South Africa has a huge unemployment problem – which is of course linked to the inequality problem … but they’re not one and the same thing.
As I see it, there is really only one way to address unemployment, and it’s not for President Ramaphosa to arrange another national indaba that comes up with a six-prong plan. It’s much simpler than that: create a business-friendly environment where entrepreneurs can flourish.
I’m a firm believer in free markets, and entrepreneurs create more and more jobs as their businesses grow (helping to lift an increasing number of people out of poverty).
Entrepreneurs by their very nature are extremely enterprising people. They take risks, they invent things, they solve problems, they work hard, they motivate other people, they are singularly focused. Ultimately, they change the world – mostly for the better in my view.
But no entrepreneur will ever be happy with a legal system where everything simply ‘stops’ with them – that is, one where they’re not able to create a legacy or pass on the wealth they’ve created to beneficiaries of their choice (which might include charities, by the way, even for 99% of their net worth – just look at the examples of Bill Gates and Warren Buffett).
Don’t we all wish that Elon Musk never left South Africa, and that rather than Silicon Valley, he’d chosen the Stellenbosch Technopark to launch Tesla (not to mention SpaceX)?
Do you really think that someone like Musk would ever pursue these ventures in an environment where anything (inheritance or otherwise) is taxed at 100%?
One more point, before I offer an alternative: I actually used to think similarly to you, Pierre, not really caring about what happens to my modest amount of assets upon my death. As part of the social media storm around your article over the last couple of days, I saw a tweet by Max where he said that he hopes to enjoy his last ever Johnnie Walker Blue just before he dies penniless one day … I get that.
But then, just under 13 years ago, I became a father for the first time. And having a child changed me from a selfish, middle-aged curmudgeon to a slightly less selfish, slightly older curmudgeon. Now it really matters to me – a lot, in fact – that my daughter will hopefully be okay (financially speaking) when I kick the bucket one day. And I will never be happy for a government to take everything that I would otherwise leave to her.
So, here’s my suggestion – with full credit to Merryn Somerset Webb, the editor of UK personal finance magazine MoneyWeek and also a contributor to the Financial Times.
A few years ago, she suggested that inheritance tax should be abolished completely, and that it should be replaced with a gift tax instead.
This would mean taxing not the estate of the dead person, but the recipients of the cash, for whom it should be considered unearned income. This would then be taxed in the hands of the recipients at their marginal rates.
In the words of Somerset Webb herself: “This would, I think, have two happy effects. As the tax would be nothing to do with the estate, the elderly would know that avoiding it was not in their power, something I suspect would relieve them of a great deal of stress … It would also have an element of progressiveness the current system does not have (the lower your income-tax band on receiving your gift the less you pay). Good isn’t it?”
In South Africa, this would mean a tax take of perhaps double the current 20% inheritance tax rate – going quite a long way towards addressing the inequality issue (but without destroying tax morale).
Perhaps you and I (and Max) can discuss this over a whisky one day?
All the best,
Deon Gouws is chief investment officer at Credo Wealth.
Luister na Moneyweb editor Ryk van Niekerk se onderhoud met Pierre de Vos: