Let them eat macaroons
The world’s super-rich swanned around a luxury ski resort in the charming Swiss town of Davos. They sipped champagne and nibbled on macaroons while trying to get to grips with the threat of rising inequality.
The World Economic Forum (WEF) has identified this as the single largest global risk in 2017 and the issue finally has world leaders in designer suits sitting up and taking notice, especially as it has started taking its toll on the developed world.
The growing gap between rich and poor was a key reason for the citizens of the United Kingdom to vote to leave the European Union and, undeniably, it was also a major factor in the unprecedented election of Donald Trump as the 45th president of the United States.
Globally, more and more literature, such as Thomas Piketty’s Capital in the 21st Century, suggests the tide is turning against the Washington consensus of low marginal tax rates and the broadening of the tax base.
In South Africa, one of the most unequal societies in the world, inequality is at the heart of the biggest issues faced by the nation. It is a problem inherited from apartheid, which greatly skewed levels of income and wealth along racial lines.
Tasked with the unenviable job of figuring out how to bridge the gap, and having lost a few hairs over it, is Judge Dennis Davis, who is the chairperson of the Davis Tax Committee.
It was established in 2012 and given a broad mandate to look at the appropriateness of South Africa’s tax system. Specifically, it was also required to look at what role the tax system can play in promoting inclusive growth and to narrow the gap between rich and poor.
Speaking to the Mail & Guardian this week, Davis said the tax system can promote equality “depending on what you tax and how you use it”.
Striking a balance is important. “We must consider how much we can actually tax without sending the economy into a tail spin, but also how much do we need in order to deal with the core issues like health and education.”
Taxing the rich is an obvious place to start, he said, suggesting that estate duty, capital gains tax and marginal or income tax rates can, and should, all be hiked.
But such Robin Hood-style tax policy is subject to a great deal of contestation. “I’m struck by the mean-spiritedness [of people],” he said.
“There was a settlement in 1994 in which wealthy people did pretty well out of it. They got through the system,” he said.
He described attitudes to wealth taxes as “appalling”. “I find it shocking there are people telling me we can’t increase estate duty, capital gains tax shouldn’t be higher, that the marginal tax rate shouldn’t increase. Why not? Quite frankly, we should be paying more tax and we should be spending more [on the poor].”
Capital knows no race, he said. “People who accumulate vast money and wealth struggle to understand the plight of the heaps under them.”
The tax committee has recommended to the finance minister that estate duty be raised from 20% to 25% where the taxable value of the estate exceeds R30-million, although South Africa’s estate duty is already fairly high compared with many other developed and developing nations.
But taxes on the super-rich, such as the proposed higher estate duty, will not be nearly enough. “That’s the astonishing thing,” said Davis.
“I don’t think it will bring in more than three, five, six billion rand.”
Tax revenues in the 2015-2016 financial year tallied just over a trillion rand. The treasury estimated an additional R43-million would be needed to meet spending obligations.
The finance minister has proposed a hike in capital gains tax, ranging from an increase of between 2.75 and 5.49 percentage points. This means individuals and special trusts would pay 16.4%, companies 22.4% and other trusts 32.8%.
Davis suggested that the marginal tax rates should also go up by three or four percentage points.
That would still not be enough. “Frankly, we are going to need to increase VAT,” Davis said.
A potential hike in VAT is hotly debated. Critics, including organised labour, argue it is retrogressive because a VAT hike means the proportion of income that poor people spend on this is higher than that spent by the rich.
But Davis argues that a hike in VAT isn’t retrogressive if the resultant revenues are spent properly.
“This country has to start thinking laterally to reduce inequality,” he said. “The idea of you can’t increase VAT for any reason or purpose is ridiculous. If you can ensure it results in better transport and better healthcare and better education, there is a case for it.”
When it comes to corporate income tax, there is scope for higher revenues. At present, the notional rate is 28% and often bemoaned as being one of the highest in the world. But the effective rate — what companies actually pay — is thought to be much lower. Exactly how much lower it is remains unknown and is the subject of an ongoing study by the tax committee.
Davis said a 1% or 2% hike would not scare corporates away. “It’s all about certainty and whether we can ensure delivery on what we have promised. If they think they will make a return, they will do business here.” Ultimately the issue is: “We can squeeze more money out of the system but that’s not good enough. We need things to work on the other end,” he said.
On the expenditure side, the tax and transfer system the government has been using — through the social wage, which includes social grants, housing, education and medical benefits — has brought down South Africa’s Gini coefficient (a measure of inequality) but it remains the most consistently unequal society in the world. Without the social wage, Davis said, it would be even worse.
But there have been missteps in spending too, said Davis, and South Africa requires the political will to ensure that additional tax revenues are well spent.
The tax committee has produced reports on VAT, estate duty, mining, small and medium enterprises, base erosion and profit shifting, and the carbon tax. It has most recently called for submissions on funding the proposed National Health Insurance scheme.
Davis said he hoped the committee would complete its work in the next 12 months or so. “It’s enough now. It’s time to start implementing.”
A pink Davos
On the snowy slopes of Davos, delegates were tickled pink to rub shoulders with celebrities such as will.i.am and Shakira. The Latino songstress was one of several women there, which saw the World Economic Forum (WEF) boost its proportion of female delegates to 20% for the first time.
To coincide with the WEF event in Davos, Oxfam, a global confederation of nongovernmental organisations, released its report, titled Economy for the 99%, which maps out the chasm between the world’s richest and poorest citizens.
The report found that just eight men own the same amount of wealth as half the world.
Danish professor Bjorg Lomborg, writing for USA today, noted Oxfam has measured wealth and not income inequality resulting in, for example, an American with a student loan (negative wealth) being poorer than “a day labourer from Zimbabwe with nothing but a comb to his name”.
Ronald Wesso, a senior researcher for Oxfam South Africa, said the obvious policy mix that would serve to bridge the wealth gap would be a progressive tax system. “Instead, we are systematically cutting taxes for the wealthy and raising taxes for the poor,” he said. Policy that would lessen inequality includes higher minimum wages and initiatives such as women-centred land reform.
The obvious one, Wesso said, is a wealth tax.
Social grants are not enough to address inequality.
“Redistributive policies have never really failed. If they have, it has been because elites have acted to roll them back,” he said. “Minimum wages, progressive tax systems, free accessible service, these have always worked in assisting human development.”