South Africa needs to fix its dangerously wide wealth gap

When inequality is discussed, the focus tends to be on income brackets. But the main problem is wealth inequality.

South Africa is known for its extreme income inequality, which is one of the highest in the world. Ten percent of the population earn around 55%–60% of all income, compared to only 20-35% in the advanced economies.

But while the top income share is high in its own right, it pales in comparison to those for wealth; such as real estate, pension funds and shares of listed companies. New tax and survey data suggest that 10% of the South African population owns at least 90–95% of all assets. This share is much higher than in the advanced economies, where the richest 10% own “only” around 50-75% of all assets.

Why does wealth matter? First, the level and distribution of wealth in a country are important indicators of its citizens’ long-term welfare. Whereas income and consumption tell us something about a household’s current living standards, information on wealth is important in assessing whether the household can sustain these living standards during spells of unemployment or throughout retirement.

But wealth is also of particular concern for long-term inequality. This is because wealth can generate its own income (such as interest, dividends, rents, and capital gains), and can be passed on between generations. Over time, small differences in assets can therefore grow larger and larger. As Thomas Piketty argues in his influential book on wealth and inequality (Capital in the 21st Century), this tendency has been one of the biggest drivers of growing inequality in both advanced and developing countries.

A growing number of studies have suggested that high inequality can have unfavourable political and economic consequences, which is why South African policymakers are increasingly concerned about it. Currently, most initiatives focus on inequality of income and consumption, since these variables are closely linked to poverty and exclusion.

But based on my own research I argue that narrowing the wealth gap also deserves close attention.

Why wealth is difficult to measure

We know that South Africa’s wealth distribution is highly unequal. It is, however, very hard to measure precisely how unequal it is. This is because our usual tools are well suited to measuring income and consumption, but not very good at measuring wealth.

The most widely used data on living standards come from household surveys. Their main limitation when it comes to measuring wealth is that participation is voluntary and that richer households tend to be less likely than others to participate. In addition, many people are not aware of the current value of their assets or feel uncomfortable talking about wealth.

Because of these limitations, researchers have started to use data from tax records. Since tax filings are mandatory, tax data do not run the risk of under-representing individuals at the top of the distribution.

Nevertheless, tax data have their own limitations. First, they tell us nothing about the population whose income is too low to require income tax filing. In South Africa this group comprises more than 80% of the population. Secondly, they do not allow us to measure wealth directly since only investment incomes are taxed in South Africa.

While this approximation introduces an element of uncertainty, it is currently the only way to get data on the top of the wealth distribution.

Extreme wealth inequality

In my research I combine tax and survey data. Three main findings stand out:

  • The wealthiest 10% of the population own at least 90–95% of all wealth, whereas the highest-earning 10% receive “only” 55–60% of income.

  • The next 40% of the population – the group that is often considered to be the middle class – earn about 30-35% of all income, but only own 5-10% of all wealth.

  • The poorest 50% of the population, who still earn about 10% of all income, own no measurable wealth at all.

The fact that the bottom half has very little wealth is not unique to South Africa. What is striking, however, is the small wealth share of the middle of the distribution. Income- or consumption-based studies find that around 20% to 30% of South Africans belong to the middle class.

But my analysis suggests that a “propertied middle class” is largely nonexistent. This differentiates South Africa from the advanced economies, where a much larger share of the population owns significant financial and non-financial wealth.

The data also show that race plays a role in inequality, as average wealth still differs strongly between groups. Nevertheless, they suggest that wealth inequality within the majority black population far exceeds overall inequality. This is consistent with the findings of a study on income inequality, which shows that the income distribution is increasingly shaped by growing inequality within race groups rather than inequality between race groups.

Implications for policymakers

In theory, the extreme concentration of wealth in the hands of a few can be addressed from two sides: redistributing wealth held at the top or building wealth at the bottom.

In reality, however, these two approaches should be balanced by combining taxation of top wealth holders with policies to encourage middle-class wealth formation. This is because South Africa has a relatively low level of private wealth and should not risk reducing overall private saving and investment.

The most common tools for redistributing wealth are taxes on investment incomes and inheritances. Currently these taxes constitute only a tiny share of total tax revenue. Taxes on investment income makes up about 1% of total tax revenue while inheritance tax makes up 0.1%. The current proposals of the Davis Tax Committee aim to increase these shares by closing loopholes in the estate duty.

More effective inheritance taxes can be very effective to counter the tendency of growing wealth concentration. But there are practical challenges when it comes to taxing the wealthy effectively. Wealth can easily be shifted between asset classes, ownership structures and tax jurisdictions to avoid being subject to taxation.

The Panama Papers showed the extent to which the efficacy of wealth taxes is limited by the fact that large fortunes are moved out of the reach of national tax authorities.

Helping lower- and middle-class households build wealth may therefore be a more effective way to promote a more equitable wealth structure. Since pension assets are the single most important form of wealth in South Africa, a more comprehensive pension system would be particularly effective in reducing wealth inequality. The current proposals by the National Treasury, which aim to increase the coverage of occupational pension systems and reduce pre-retirement withdrawals, are promising.

The new figures on the extreme extent of wealth inequality should provide some tailwind to these proposals, which could jointly lead to a more equitable wealth structure in South Africa.

The Conversation

Anna Orthofer, Economics PhD Candidate, Stellenbosch University

This article was originally published on The Conversation. Read the original article.

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Why is SA always compared to the developed countries? The rate the country grows it will be 50-100 years before SA reaches the current per capita GDP of the ex-communist European countries like the Czech Republic or Hungary and 2-300 years to reach the German level. What is the case in other BRICs countries? We should be compared to them instead of Germany or US.

And wealth inequality stems from poor education and a poor system of capacitating young individuals to be productive citizens.

So here are a few tips:
– Understand how the top 5-10 countries in world deal with education and absorption of the young into the economy. You will find that the ANC did the exact opposite of what makes Germany tick well – emphasis on trades and master craftsmanship and a system where everyone does apprenticeships.
– Set up a wealth fund from profits from SOE’s (if there is any left) and royalties from sectors such as the mining sector (why must just the Royal Bafokeng and Bakgatla tribes benefit from the platinum that just happens to sit beneath their feet).
– And most importantly – STOP CORRUPTION AND THE WASTING OF STATE MONEY (not sure this is possible under an ANC Government).

Thank you. I like the part about “emphasis on trades and master craftsmanship and a system where everyone does apprenticeships”

Because some people have the mentality to spend a little less and save and invest that little difference between income and expenses and the masses do not have this mentality, the wealth gap will grow and grow.
I will also want to see the comparison with other BRICs countries… Maybe even a comparison with Nigeria or Tanzania.

This view of more equality = better country does not really hold up in practice. We could solve our inequality very quickly by imposing huge tax burdens forcing all the wealthy to emigrate in the next year. Then the country will be very equal but will it be better? I don’t think so.

Or for example say Bill Gates (in theory) wants to move to SA. Then by the reasoning above it will be bad for the country because it will definitely increase inequality. But in real life it will be good for our country.

If every poor African country could attract a few very wealthy entrepeneurs it would benefit them hugely, but based on the reasoning of inequality it’s a bad thing because yes the countries will have more inequality.

“Here I encounter the most popular fallacy of our times. It is not considered sufficient that the law should guarantee to every citizen the free and inoffensive use of his faculties for physical, intellectual and moral self-improvement. Instead, it is demanded that the law should directly extend welfare, education, and morality throughout the nation. This is the seductive lure of socialism. And I repeat: these two uses of the law are in direct contradiction to each other.” – Frederic Bastiat

South Africa’s interest lending rates are 2 or three time higher than almost anywhere else in the world. What that means to you and I is that the poorer and middle class will never ever have the opportunity to own their own homes.

like #feesmustfail I really do believe the time of talk talk talk is running out. next year is the 100th anniversary of the Russian revolution. maybe looking at how the Bolsheviks sorted out their wealth inequality issues – or the Cubans for that matter – will be time well spent

Forcing those with capital and resources to leave South Africa will result in the wealth gap left in South Africa reflecting a more equalised wealth gap. But the brain drain and the capital loss to the country will be too much to keep the economy afloat.

Concern yourself with educating the population, stopping corruption, improve the health system, speed up the judicial system, reduce the excessive out of control legal fees charged, force banks to reduce charges, limit COE and top management bonuses especially those given to the top people in the SABC, ESKOM, SAA, IDC other SOE’s etc. Reduce expense accounts of the MPs and the Cabinet. Reduce the cabinet to half the numbers, reduce the number of provinces back to only 4. Force people to fly economy and to use 3 star and less hotels when away on official business. Cut the daily money paid when away on business.

So there you have it. Nothing will improve until government has buy in to cut their costs and to stop corruption from the top down.

Yes the inequality is dreadful and I am going to do something about it. Without being dramatic, (I recently came to believe in God and I won’t be insulting people on MW anymore). 🙂

Human beings, and all things in nature, are diverse. This is a non-changeable fact. The fundamental objective of the article, to make all people equal, is flawed. Try as one may wish to, this will not succeed. you can safely bet all your wealth on this.

“In theory, the extreme concentration of wealth in the hands of a few can be addressed from two sides: redistributing wealth held at the top or building wealth at the bottom.”

This is the old argument between dividing and sharing the pie that we have, against making a bigger pie for all. With an economic growth rate of nearly zero, we are be default stuck in the first scenario. We will all get poorer, through the phenomenon of natural entropy. Meanwhile the rest of the World progresses to grow assets and thus grow wealth. This approach is economically suicide and intellectually lunacy. If you work the numbers, you will find that you cannot make the poor much richer by making the rich much poorer.

We cannot solve the problems that we have created for ourselves with the same thinking that created them in the first place. This must be radically and disruptively changed, however uncomfortable as it may be. We must start with tackling corruption and other non-value-adding redistribution of assets and wealth that we have now.

Just as “wealth can generate its own income (such as interest, dividends, rents, and capital gains), and can be passed on between generations”, poverty contributes to an even larger inequality gap by procreating at levels way higher than they can afford – if at all. Hence the poor actively and enthusiastically contribute to making the gap even larger. Education is a must, which needs to include critical thinking and logic. This might result in more poor people choosing sterilisation instead of groundless hope that society / government shall provide. Mindless idiots floating across the Med hoping to reach Europe while pregnant or with children less than a year old are a case in point. This refugee crisis has been around for way much longer than the point of conception. It’s criminal to bring a child into such a world – in fact evil. That is the elephant in the room among these “Pikettyites”.

Is SA we are also up against a cultural thing. ie many children are needed for their old age. The old generation sired these kids so they can live with them when their working career comes to an end and they have not accumulated anything. Non accumulation culture. In my 42 years of farming I tried to make my staff accumulate by opening bank accounts and buying unit trusts for them. They eventually demanded I hand over the savings as they wanted to “work” with it. Result gone in 60 seconds. The culture of the funeral is also huge waste. My staff would borrow from me to buy sheep and cattle for funerals. It would take them years to pay it back, or they would take a pregnant cow of theirs and slaughter it for a ritual. cost then R8000 plus. I used to plead with them that R1000 meat from the butcher was more than enough, but no it is their culture.

End of comments.

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