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Sunday World - - Opinion - 21st Cen­tury, Cap­i­tal in the

SOUTH Africa is known for its ex­treme in­come in­equal­ity, one of the highest in the world. Ten per­cent of the pop­u­la­tion earn about 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 SA 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 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 grow larger and larger. As Thomas Piketty ar­gues in his in­flu­en­tial book on wealth and in­equal­ity,

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 SA pol­i­cy­mak­ers are in­creas­ingly con­cerned about it. Cur­rently, most ini­tia­tives fo­cus on in­equal­ity of in­come and con­sump­tion, as 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.

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

The most widely used data on liv­ing stan­dards come from house­hold sur­veys. Their main lim­i­ta­tion in mea­sur­ing wealth is that par­tic­i­pa­tion is vol­un­tary and 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 SA 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.

The wealth­i­est 10% of the pop­u­la­tion own 90% - 95% of all wealth, whereas the highest-earn­ing 10% re­ceive only 55% - 60% of in­come.

The next 40% of the pop­u­la­tion the group 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. That the bot­tom half has very lit­tle wealth is not unique to SA. 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 SA 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 in­come dis­tri­bu­tion is in­creas­ingly shaped by grow­ing in­equal­ity within race groups rather than in­equal­ity be­tween race groups.

In the­ory, the ex­treme con­cen- tra­tion 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 SA 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. 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 by clos­ing loop­holes in es­tate duty.

More ef­fec­tive in­her­i­tance taxes can 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 be a more ef­fec­tive way to pro­mote a more equitable wealth struc­ture. Since pen­sion as­sets are the sin­gle most im­por­tant form of wealth in SA, a more com­pre­hen­sive pen­sion sys­tem would be par­tic­u­larly ef­fec­tive in re­duc­ing wealth in­equal­ity. The pro­pos­als by Na­tional Trea­sury, which aim to increase the cov­er­age of oc­cu­pa­tional pen­sion sys­tems and re­duce pre-re­tire­ment with­drawals, are promis­ing.

Orthofer is an eco­nomics PhD can­di­date at Stel­len­bosch Uni­ver­sity. Source: http://the­con­ver­sa­tion.com/

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