The Davis Tax Committee has invited comment on its proposal to tax wealth in SA. The committee is looking specifically at taxing land, a national tax on property (in addition to existing municipal taxes) and a wealth tax.
In justifying these proposals, the committee points to SA’s exceptionally high levels of income and wealth inequality. It correctly notes that inequality "inhibits economic growth and undermines social, economic and political stability".
In believing wealth taxes are the way to tackle inequality, the committee appears to be influenced by the popular work of French economist Thomas Piketty, who provided important evidence that inequality is rising globally. Much more controversially, Piketty claims rising income inequality is caused by wealth inequality. So, it must be deal with by taxing wealth.
Piketty argues that in capitalist societies, the return on capital outstrips economic growth and wage increases. So, the income gap between the owners of capital (the rich) and the owners of labour (workers) widens. Because the rich pass on their wealth to their children, who also benefit from better education and social networks, inequality is perpetuated.
Former US treasury secretary Larry Summers says there is overwhelming evidence to reject Piketty’s claims on the returns on capital. Most economists believe that the more one uses a factor of production, so its marginal productivity (or "return") will fall. Summers says he knows of no empirical studies supporting Piketty’s claim that this rule does not apply to capital assets. He knows of plenty showing Piketty’s claim to be false.
Summers also disputes the claim that wealth is automatically perpetuated across generations. He notes that few of the superrich in the US inherited their wealth. Summers attributes their rapid rise to globalisation, which allowed the new ideas and technology they developed to be sold into huge markets.
Summers concludes that Piketty has failed to correctly identify the cause of rising inequality. In this, he is supported by most economists, who believe income inequality is caused by highly unequal earnings in the labour market. The few individuals with specific skills that are in short supply earn huge salaries compared with the many whose skills are plentiful. Only through much better education can the causes of such disparities be reduced. Taxes tackle only their consequences.
Piketty acknowledges there is no easy solution to wealth inequality. He agrees it is difficult for countries to tax wealth, because wealth can easily be hidden or transferred abroad. Piketty therefore argues that to be effective, wealth must be taxed globally. This, too, is likely to fail given the incentive for cheating. Countries without wealth taxes will benefit from immigration of the wealthy.
The Davis committee targets land and property, suggesting it may share Piketty’s concern about the mobility of wealth. However, its proposed annual wealth tax falls into the same trap. It may encourage transfers to assets like paintings or coins that cannot be measured or, more worryingly, moved abroad, exacerbating capital scarcity.
It is also not clear how the committee proposes to contend with the reality that capital assets do not always generate the income needed to pay such tax. Farm land during drought, pensioners’ homes or the actuarial value of pension funds are all wealth, providing value but no income stream until they are sold or cashed in.
What at first glance looks like an easy solution risks creating more problems than it will resolve. Rather than recommending the seductive "fix all" of a set of wealth taxes, the committee should look for solutions in education and the labour markets, including remedies for skills shortages, youth unemployment and the social support system for the poor.
• Keeton is with the economics department at Rhodes University.
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