SA haunted by a growing wealth imbalance

DESPITE being one of the leading economies in Africa, South Africa has a great imbalance between the wealthy and the poor. Our Gini coefficient – the measure of the gap between incomes among groups in a society – is one of the worst on the globe. It means that there are some citizens able to live privileged and comfortable lives, but there are huge numbers living on or below the poverty line. And with the poor economic growth of recent years, this situation is getting worse.

One of the concerning results of this is that the portion of the population able to contribute to the tax base is very small. The burden of the country’s revenue needs falls largely on the small middle class, including the wealthy.

This has been exacerbated in recent times, because of the limited amounts of fiscal revenue being collected – which means that fiscal revenue is not able to meet the expenditure needs of the state.

As a result, the state has looked to high net-worth individuals (HNWIs) as a source of greater revenue. But it has reached the point where many wealthy people feel that they are being unfairly targeted for greater tax liabilities.

People generally are comfortable to pay taxes if they feel that the taxation system is fair, and if they can see the benefits to the country of the taxes they have contributed. But, when the state increases the tax burden on the wealthy as a result of mismanagement, propping up failed state-owned enterprises, and the looting of state coffers through corruption, there is a strong sense that the tax burden is no longer fair or justifiable.

In addition to the tax burden, comments about land redistribution without compensation, and resultant actions and threats, are causing HNWIs to feel less secure in the country and to wonder about the future. Despite the positive promise of the Ramaphosa presidency, many individuals have a heightened sense of uncertainty.

This is the background to the significant immigration from the country by those with the greatest means to live elsewhere: it is estimated that, since 2000, well more than 8 000 wealthy people left the country, removing large sums of wealth in cash and other assets from the country.

From a financial perspective, the impact on the country is worrying. Not only are assets taken out, but the country loses the current and future income tax that these people would have paid. In addition, in many instances, they close locally-based businesses, too, so cutting jobs, which only adds to the already extremely high levels of poverty in the country. In addition, the loss of skilled people and those with business experience impacts the country, in that our already poor skills base becomes even smaller.

The route to correcting the Gini Coefficient is certainly not through reducing the numbers of wealthy people. Instead, the country should be working towards growing the size of the middle class. This can be achieved through a concerted effort by the state to create more employment opportunities, in partnership with the private sector, which is crucial for the creation of meaningful and sustainable new jobs.

This should be done together with a greater focus on the effective delivery of skills training. Concentrating on these factors will allow many South Africans currently under the yoke of poverty to move out of that situation and become income-earners able to support themselves and able to pay taxes.

Other Gini Coefficient data shows that the lowest income inequality is found in the richest countries, like Sweden, Germany and Britain. In fact, in the Nordic countries, the middle class makes up the largest group in society – at around 65 to 70 percent of all households.

The situation in South Africa is far from this.

Our focus should be on making the wealthy feel comfortable to stay in the country. This way they will continue to contribute economically and remain on as taxpayers.

South Africa provides plenty of the factors positive for the wealthy to remain here. The quality of life is very favourable for those with means – the natural beauty and good climate make it an attractive place to live. Private healthcare and schooling are generally of high quality. The luxury property and retail market is well developed with superior food stores, international clothing brands and other luxury items being readily available. Our private security industry is also well developed.

In addition, the country has a sophisticated and well-developed financial market. A global firm like the Geneva Management Group has chosen to open offices in the country for exactly that reason.

With the potential for greater political stability promised by a Ramaphosa presidency and a strengthening rand, the likelihood of growth in the number of HNWIs is promising.

However, the state needs to ensure that, through fiscal reform, it changes the perception that the wealthy will be singled out as a target of greater taxation, to fill coffers that have been raided by corruption and graft. This could be done through meaningful initiatives that reflect genuine efforts geared to reduce our unemployment rate and so to widen the tax base of the country.

With a focus on getting more people working and on the education needed to improve our skills base, we may well be able to look forward to a larger middle class, and stop the scenario of “the rich getting richer, while the poor get poorer”.