Wealth taxes are just plain stupid

How to change wealth distribution without another tax.

The Davis Tax Committee 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 the country should be doing about it.

Well, the Oxfam report is mostly based on the Credit Suisse Global Wealth Report 2016, and there are some facts in the report that the minister and Oxfam did not make public.

The distribution of wealth is more even in South Africa than it is in countries such as Denmark, Sweden and even the United States.

We have a wealth Gini coefficient of 83% – the Gini index being a measure of inequality based on residents’ net wealth, with a score of zero denoting perfect equality (where everyone has the same amount) and 1 indicating perfect inequality (where one person has all the wealth). Obviously, the lower the Gini coefficient, the better.

Denmark comes in at 89.7%, the US at 86.2%., and Sweden at 83.3%. Even Norway has a high score (80%) – and there are numerous countries above 90%, including Suriname at 99.5%. The world wealth Gini is 92.7%.

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 three points of our wealth Gini coefficient.

There is only one country with a wealth Gini coefficient below 50% – Slovakia (49%), its wealth being far less equally distributed than its income, 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 African median wealth was in the top half of countries 10 years ago, but we have slipped to 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 fairly distributed.

How to fix South African wealth distribution

Wealth is made up of two main assets: housing and financial assets. These two assets 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, black farmers only get access to land – not the title deeds. It then prohibits these farmers from full title and real finance. This says that government does not trust these farmers, but it continues to complain about unequal land distribution. This applies to about 4 000 farmers; equal to 10% of commercial farmers.

Furthermore, households in traditional areas represent about 8% of all households. They generally only have a Permission To Occupy (PTO). This system should be changed. 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. This  is one of the reasons he battled to get a loan from a bank against the property.

In short, without any additional costs or expenses, SA’s home ownership rate could jump to 85%. This would revitalise the economies of many areas all over South Africa, and would 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 second 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. A 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.

What if these beneficiaries were changed to shareholders? It would take one stroke of the administrative pen to change the wealth distribution of financial assets in the country.

These proposals will improve SA’s wealth Gini coefficient. That was the purpose of BEE. It seems as if beneficiaries are not aware of the wealth they have amassed as they don’t 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 because 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, not taxes. Taxes will only distribute to government – not to the people.

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

Change the taxes to make employee ownership easier, and encouraged. This would spread the wealth further, increase ownership, and probably boost 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 South African citizen shares. This would also spread the wealth far more equally than before.

Administrative changes are the way to go

Administrative changes will be a much more effective way to transfer wealth. Wealth taxes are just plain stupid. They will not redistribute wealth, and will reduce economic 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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once again mr schüssler is addressing HIS audience of haves who do not want to share their wealth with anyone -esp the have nots. this is very easy – and I am sure it does him NO justice but it amazes me that in a country with so many problems esp as regards wealth distribution that he is the front line- in fact the original DR NO! change is coming – whether people like it or not. the 1994 agreements did not solve any of the critical issues – esp as regards righting the wrongs of the 1913 lands act. may I remind him and his followers what sol plaatje said on 20 june 2013 -“the south African native (sic) found himself .. a pariah in the land of his birth”

This is rich coming from an Australian. I have visited Australia several times and the native people live in incomparably worse condition than the settlers. Of course the problem is not so obvious there since the settlers made sure that large percentage of the natives were eliminated years ago.

can you be specific regarding aus “natives” being eliminated especially in comparison to the extermination of the khoi san and bushmen people by the dutch and german settlers in the cape and then swa which resulted in them being forced to survive in the most inhospitable places in the world – Kalahari desert

Robert, you are always so selective with facts, and in doing so you kind of negate your argument. Yes the Germans and Dutch probably did kill quite a few Khoi, but so too did the African tribes of the time. As the saying goes: Autres temps, Autres moeurs.

Here is a list for you: https://en.wikipedia.org/wiki/List_of_massacres_of_Indigenous_Australians (Sheesh, bit worse than I imagined)

We really shouldn’t be pointing fingers though about what happened a hundred years in the past. We should be looking to the future and how we can make peoples (our children’s and future generations’) lives better through innovations, productivity, efficiency and economic growth. Problem with a wealth tax is that it is regressive, and funds will be squandered (as is evident already). People of tired of paying tax and not seeing it put to (productive, legal) use, and then being blamed for the state of the nation/economy.

Don’t be ridiculous Robert. According to reliable records, from the Union, Sol Plaatje died in 1932. Neither he nor his ghost said anything in 2013 (at least not that I know of).

Mike was not “addressing his audience” but merely doing an objective assessment of the facts and discussing solutions that work and those that have never worked. Simply put, SA’s Gini coefficient is not really that high in context, and lower than Sweden and Denmark, each of which is an over-taxed socialist morass of note, overrun by economic migrants from Africa who contribute little but take much.

Once again you tip your hand and your lack of empathy in fact unbridled contempt for white South Africans is evident. Fairly transparent, there Robert. In most successful countries a small minority of individuals or corporations own the farm land and it is used for the benefit of the majority by maximising agricultural output and thus the value of the land. Farmland is tradeable in a free market and the value thus assigned to it is the discounted future cash flow that it can generate adjusted for risk. In many African countries the “land issue” was addressed by expelling whites and handing over land to pals. The fact is this merely sunk the standard of living, into the Marianas trench, for those unfortunates left behind. Think of the massive productive estates in the DRC: The jungle has now reclaimed its own: schools, hospitals, factories and the plantations. The locals say when the Belgians came they took what they wanted by force. If they wanted to come back they would be welcomed.

http://content.time.com/time/world/article/0,8599,1713275,00.html

If most people had an inkling on the role capital accumulation, capital flight and the entrepreneur has in the wealth of nations they would never go down this road. It is frankly, unconscionable on your part. I, for one, suspect you do have an inkling and would look on with more than a scintilla of malice, from afar, if SA was razed to the stone age by African Nationalist folly.

it was a typo – should be 1913.
I am merely the messenger for the landless masses – those forced off their land over the time that settlers have been in sa. I think you should be convincing the majority of south Africans – most of whom believe there HAS to be some form re-payment. suggest you peruse this – from one of YOUR mp’s –

http://www.timeslive.co.za/politics/2017/02/28/WATCH-Dutch-gangsters-took-our-land-%E2%80%93-Julius-Malema-debates-to-take-land-back

remember he speaks for millions

Negative. No deal. I don’t play that game, Robert. As self-appointed remote hosted spokesperson for the landless South African masses you must be really proud of yourself speaking for millions like that.

In all cases such as this there is the right thing and the wrong thing to do. Unfortunately politicians are wont to give into populism to the detriment of the country. If the landless masses are given a small serviced patch of land to build a house, I suspect this won’t be enough to appease the likes of Julius. It is really about targeting the white owned farms. Once they have stolen the production (income/ company tax), the means of production (expropriation of factories and farms) they will steal the value of the currency. It is always like this. The inexorable folly of Africa.

The problem is that expropriating the farms, dividing them up and handing them over to heaven-knows whom on ####-knows-what basis is not going to stand the country in good stead by any measure. There will be capital and skills flight like never before. The Rand will collapse along with agricultural production. Interest rates will rocket with food prices (now imported on a weak Rand) and industrial output will fall. Foreign investment will dry up in favour of North Korea. There will be widespread hunger and riots. R200 per liter petrol and milk. The ANC will enact more populist measures. The economy will collapse. A weeks wages to buy a loaf of bread. The country would be razed.

Sounds like just the scenario that would have you licking your chops.

BTW Julius is not one of my MPs. Furthermore every time you use an apostrophe to make a plural (e.g. MP’s) a puppy dies. You can Google that one.

You have got 458,520 impoverished aboriginal neighbours who have got no title deeds because you stole their land. If you are such a philanthropist, why don’t you start making a difference where you live?

Moneyweb needs a thumbs down vote for all these nonsensical, condescending rants of Robert’s that make very little sense.

no title deeds hey? suggest you read the mabo case decision in the 90’s that recognised land rights of the indigenous people of aus

For the utterly ignorant amongst us, I would like @robertinsydney to provide a concise overview of the 1913 Land Act, its relevance today as well as the musings of Sol Plaaitjie. I can’t understand why you keep going on and on about it like some sort of doomsday prophet sitting in Sydney. Thanks

1913 lands act – that’s when “Africans” were allocated 13% of arid land – while 87% (mainly rich commercial arable land) was allocated to whites

Wealth distribution in Australia is just as bad, the bottom 20% owns less than 1% of the total wealth.

all these experts on aus and its people. from a recent creditsuisse report “only 6% of Australians have net worth below us$10,000 – compared to usa – 29%, sa 68.2% and 70% for world

How does giving people title deeds to their homes and place where they stay not help people. That gives people something to own and do things with. Currently it cost about R160 000 for government to build an RDP house. People living in the RDP house would get that at least in value terms and they could use their hands to build, plant or fix it and get more money. Or build a shack and rent out – which people often do. Over 3 million families will benefit from this. How is that adressing “my audience”?

Giving people a paper that entitles them to certain profits and shares that can be sold in say 5 years time also should help people gather some wealth. The BEE groups say that they represent 11,4 million and another 0,4 million via community are people who indirectly benefit. Making them direct or indirect shareholders would enhance the value of the financial assets they own. What has that to do with addressing an audience?

Government acknowledges that 4000 African Farmers need their title deeds. That too would change the Landscape of ownership in South Africa.

People must get direct or at least more direct access to the assets that are “given” to them without title deeds or ownership. That is plain wrong and has nothing to do with an audience.

Ek stem 100% Mike.
With a Title Deed in hand, even to the poorest, will give a sense of ownership. And with that the higher likelihood to spend/improve on one own property, whether be it a modest RDP-house, or a farm acquired under the Govt land-distribution scheme.”
It also means that commercial banks will then be able to make modest property-loans to any emerging farmer, or RDP-home owner (within risk norms) as then at least there’s some sort of security against such loan. Such property values (i.e. asset wealth) will start to increase with improvements, and enhance the pride/success of ownership. Brought by the power of the “invisible hand” in economic theory. Yes, we’re talking modest loans, but multiply that by a few thousand or million, and you already have improved economic activity amongst the poorest.
Such plan makes great economic sense. However, it seems Govt does not want to implement it, as it won’t fit within their political agenda to keep on riding the “redistribution rhethoric / WMC” horse to win votes back for the ailing party.

South Africa has moved on, but Rob has not. His way of thinking is still pre-1994. This is what happens when people leave the country, they remember the old South Africa.

Great article and I like the alternate use of stats. This is the trouble we have as the public, and myself as scientist. Science uses evidence based, peer-reviewed scholership as a means of determining truth in the natural world. Although more challenging to do so, our social discourse would be enhanced if this were applied. One never knows how selectively data is presented.

What would be especially beneficial if wealth were distributed in the way described is that the population may then take greater ownership of all of the countries assets.

Giving ownership of houses and the land associated to individuals has convincing advantages. However, there are practical issues that l’m not sure we know how to solve. Does one keep on doing this because many people are on the waiting list for housing? New names will continually be added. Is each citizen entitled to a plot when they reach a certain age?

Then to whom should one give state-acquired agricultural land to? In Zim much of this land supports the system of state patronage. This is a difficulty with state ownership. From this perspective, a benefit of giving land to individuals is that it is given once, whereas as long as it stays with the state, land can be used to support patronage in perpetuity. But what if land is given to a non-productive person?

Great article by Mike on data and huge social advantages to ownership distribution. But how to distribute? Answers?

typo – should read 20 june 1913 – what sol plaatje said

Dear Robert, it is clear that you have a lot of guilt feelings about the past life here in SA. With that in mind, please specify what % of the wealth that you took with you from this country, are you prepared to give back to the SA government for wealth distribution purposes?

ZERO %age. must I say that again – earned my initial wealth in the middle east and then of course with the incredible property price growth in Sydney – to which ALL people had equal access unlike sa when until 1992 the vast majority of people did not have EQUAL access

Siestog Robert. You are out of touch with SA internal affairs. Shift you focus and spend your time on Aussie related affairs.

Robert, the great South African property price growth happened after 1992, so to your own reasoning all South Africans, like Australians in Sydney, had equal access to this growth.

But, just like in Australia, people DID NOT have equal access to this wealth boom. The oppressed native Australians, had practically just as little access to this wealth boom as the HDI in SA.

daniemare

is that so! I bought a house in the “white” suburb of tokai, cape town in 1981 for R80,000 and sold it two years later for R125,000 – that’s a 50% jump. how many “non-whites” were able to do that – i’ll tell you ZERO. aus like usa, Canada or nz never had segregated racial suburbs. why can’t you guys just accept terrible injustices were done and they need to be addressed – otherwise I can only see ongoing violence

@robert
How can you say that Australia, or USA never had racially segregated suburbs? Until the 60s in the US there were plenty segregation, from schooling to suburbs. In Australia the aboriginals were not even allowed to vote until 1962 (1965 in Queensland). Slavery was abolished in SA long before in the USA.

I apologise for the poor spelling e.g. scholarship and country’s. The only excuse I can offer is that I often write using a tablet in bed. Proof reading seems not to help as the light is so dim I can hardly see.

If I read all the comments to this post, then the future is just as dim as your lighting.
Keep the lights off – things look better in the dark.

Sure – just look at the government and how well they function in the dark

Very witty remark..enjoyed that Sweetpea 😉

Here’s something to “cheer” you up:

The current “negativity” among S’Africans reminds me what someone said happened in Nazi-Germany in the 1930’s after the Nazi-party’s focus shifted more and more anti-Semitic.

“All the negative-minded Jews left Germany for the USA, and neutral countries & all the remaining positive-minded Jews (thinking worse won’t happen) ended up in Auschwitz”.

Very emotive article for all. One phrase nails it for me: “..not how we distribute wealth, but how we grow/create wealth”.
In economist Dawie Roodt’s 2013 book (Tax Lies & Red Tape) the following was a interesting view: “SA does not have an unemployment problem. Instead, we have to few wealthy people in SA” (…i.e. that can employ others & grow empires).

Four major socio-economic barriers needs to be removed/reformed (probably to be forced on the Govt later on for an IMF-bailout): constraints like over-regulation of businesses (BEE for one); the majority’s lack of education (teacher unions part of problem); over-powerful militaristic labour market; and restoring future political uncertainty about asset ownership & other economic freedoms (there’s enough rhetoric/examples).
Current political will in doing that: nope.

Govt needs to realise that global wealth follows where property is protected; economic freedoms are upheld; and low-tax environment (Monaco for example has no street beggars…)

(…I think Govt do realisea that, but they simply DON’T CARE as they’re fixated to remain in power / short-term economic goals)

Something I now to come to realise: wealthier S’Africans’ appetite for owning 2nd/3rd etc properties, being statistically higher compared to the average of developed nations. Nothing wrong with that (since our properties are cheaper in dollar-terms), but now wonder what (a desperate) ANC Govt may do to try and “tax” it, or redistribute it? An extra national real estate tariff? State capture of the Deeds Office(?).Views?

And of course the geese that lay the golden eggs have wings, so they can fly away if too many of the eggs are taken from them.

contrary to what you may read in the media – NO ONE GOING NOWHERE!

Not true, you can get a work permit quite easily, not that I would leave SA again, I enjoy it too much here in SA.

Congratulations Mike Schussler, on another great article. Please submit it to the Davis Commission on wealth taxes. Also, publish it where a wider black audience can read it.

Two omissions in this debate: 1 South African black people should be compared to their peer group in surrounding countries as well. This is as to income, living standards, life expectancy, etcetera. Can you, Mike, publish an article on this comparison.

2 Population growth has been left out of the wealth debate. Stats SA recently showed that the black population increased from 30 million people in 1994 to 45m people now. That is an increase of 50%, adding another 15m people to the country. The coloured group increased moderately and the Indian and White groups remained flat. If a country creates more people than jobs, the people will get poorer.

Population growth is the elephant in the room that no one seems to raise. If the population had stayed the same after 1994 SA would be halfway to a developed country.

The scary part is looking forward. What happens in 23 years with the addition of another 22.5m poor, angry people demanding land and services yet the economy is likely going to be the same size.

End of comments.

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