The Standard Bank’s Wealth Report for Africa for 2020 shows that the continent’s wealthiest individuals worry about what impact volatile political environments will have on their wealth
Although South Africa is known for its extreme income inequality, the degree of wealth inequality is even greater. New tax and survey data suggest that 10% of the population own at least 90% to 95% of all assets, although they earn “only” about 55% to 60% of all income.
The finding supports the ongoing proposed reforms to close loopholes in estate taxation (Davis tax committee) and expand the coverage of pension systems (treasury).
Why wealth matters
The level and distribution of wealth in a country are important indicators of the welfare of its citizens in the longer term. Whereas income and consumption tell us something about the current living standards of a household or a society, data on assets and debts are important in assessing whether households can maintain these living standards during spells of unemployment or throughout their retirement.
Wealth can generate its own income, such as interest, dividends, rents or capital gains, and it can be passed on between generations. Parents can bequeath assets to their children who can further grow them by saving or reinvesting the gains.
Over time, small differences in assets can thus grow to large inequalities. It is for this reason that, all over the world, wealth tends to be even more unequally distributed than labour income.
Since Thomas Piketty published his influential book on wealth and inequality, Capital in the 21st Century in 2014, the issue of wealth inequality has received much attention. In countries such as South Africa, where wealth inequality is particularly high, policymakers have started to ask how monetary or tax policy can be used to promote greater equality in wealth as well as income.
This article is based on recent research findings (Orthofer 2016), which are part of the overall REDI3x3 project on employment, income distribution and inclusive growth. This particular research is unique in South Africa because it uses information from personal income tax records, which was made available by the South African Revenue Service to undertake research that would be useful to the Davis tax committee.
As is done internationally, the data was made available to the researcher for this study in particular and only under tightly regulated conditions that shielded the identities of individual taxpayers.
The challenge
It is very hard to measure precisely how unequal the distribution of wealth is among South Africans because our usual tools to measure wellbeing and inequality related to wealth fare less well than those related to income or consumption.
The most widely used data on living standards come from large-scale household surveys. But the main limitation of these for measuring wealth is that participation is voluntary and richer households tend to be less likely to participate than the rest. The omission of households at the top of the wealth distribution can influence the results significantly. In addition, many people are not aware of the current value of their assets – or, if they are aware of it, they feel uncomfortable about revealing it.
Because of these limitations, researchers have started to use data from tax records as an alternative source of information on wealth. Since tax filings are mandatory (at least for people with income above a certain threshold), tax data do not run the risk of under-representing individuals and households 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 wealth itself is not taxed in South Africa (or in most other countries). One therefore has to approximate the distribution of wealth by measuring the distribution of taxable income from investment.
Measuring tools
The main data source for this research is a specially provided 20% sample of the personal income tax assessment for the 2010–2011 tax year. This sample provides information on the investment income from personal income tax records of nearly 1.2-million individuals.
But because so many of the adult population are not included in the personal income tax system and database, their income has to be imputed according to a so-called lognormal distribution.
The income tax data are also compared with data from the National Income Dynamics Survey (NIDS), which includes an assessment of wealth. Conducted during 2010-2011, the second wave of the survey provides information on the value of financial and housing assets, as well as the debts, of almost 20 000 adults. This enables a comparison of the distribution of wealth from two sources.
The findings
The wealthiest 10% of the population own at least 90% to 95% of all wealth, whereas the highest-earning 10% receive (only) 55% to 60% of income. The next 40% of the population – the group that is often considered to be the middle class – earn about 30% to 35% of all income but own only 5% to 10% of all wealth.
The poorest 50% of the population, who earn about 10% of all income, own no measurable wealth.
Although the top income shares are very high in their own right, they pale in comparison with the top wealth shares. Compared with income, wealth is much more concentrated in the hands of the few.
The high wealth inequality is confirmed by estimated values of the Gini coefficient (with a value of zero indicating complete equality and a value of one indicating maximum inequality).
For income, the South African Gini coefficient is about 0.7 in both datasets, but for wealth it is at least 0.9 to 0.95. Both these values are higher than in any other major economy for which such data exist.
Racial demographics
Since race continues to play an important role in post-apartheid South Africa, I also used the demographic information from the NIDS to study the distribution of wealth between and within racial groups.
White and Indian households are still much wealthier on average than African and coloured households. But wealth inequality within the majority black population exceeds nationwide wealth inequality by far.
These results are consistent with findings on income inequality, according to which the highly unequal income distribution is increasingly shaped by growing inequality within race groups rather than inequality between race groups (Leibbrandt et al 2010).
Tax policy implications
In his book, Piketty argues that much of the political stability and economic prosperity of the advanced economies in the 20th century is related to the emergence of a “propertied middle class”.
This research suggests that South Africa has not yet experienced a comparable transformation. Although there may be a growing middle class with regard to income (the middle 40% of the income distribution come close to owning a “fair” share of 30% to 35% of all income), there is no middle class with regard to wealth: the middle 40% of the wealth distribution is almost as asset-poor as the bottom 50%.
In theory, the extreme concentration of wealth in the hands of a small part of the adult population can be addressed in two ways: by redistributing wealth at the top (primarily through capital-related taxes), or building wealth at the bottom (for instance, by promoting saving and investment among middle-class households).
Given South Africa’s relatively low level of private wealth and its reliance on foreign capital inflow, policies to create a more equal distribution of wealth should attempt to balance these considerations.
With regard to wealth taxation, this research would support a revenue-neutral shift in tax policy from employment-related to capitalrelated taxes, which could benefit the middle class relative to top wealth holders. The bulk of tax revenue is currently collected from employment income (35% of the total tax revenue), whereas taxes on capital and investment income play a much smaller role (1%). Wealth itself is taxed only through estate duty, which is not very effective in its current form, generating only 0.1% of total tax revenue.
As those with a high income do not necessarily own a lot of wealth, and the wealthy may not earn high incomes or salaries (that is, income and wealth are not highly correlated), this means that households at the upper end of the income distribution might actually be taxed much more heavily than households at the top of the wealth distribution.
The current proposals of the Davis tax committee, which aim to close loopholes in estate duty and increase the proceeds from the taxation of wealth, could help initiate such a shift.
But there are many practical challenges to an effective taxation of wealth. Most forms of wealth are changeable and mobile, which means that wealth can easily be shifted between asset classes, ownership structures and tax jurisdictions to avoid being subject to taxation.
Meanwhile, economic policy must play a role in wealth formation among middle-class households. Monetary policy can promote saving and investment by keeping inflation rates stable, and progressive taxation can encourage middle-class saving. But the single most important form of wealth for the middle class is their pensions. The proposals by the treasury to increase the coverage of occupational pension systems might have the biggest impact yet on the development of a more equitable wealth distribution.
If participation rates were to increase and pre-retirement withdrawals reduced, this would help significantly to foster middle-class wealth formation, potentially lowering overall wealth inequality.
This is an edited version of an article which first appeared on
the Econ3x3.org website