Taxing inheritance will entrench, not decrease, racial inequality

07 August 2020
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The current debate about inheritance in South Africa, sparked by an article by Professor Pierre de Vos on inheritance, misses some crucial points.

While De Vos argues his point well, he does not come close to covering all the potential pitfalls of his suggestion (as he acknowledges towards the end), including the blatant unfairness of imposing restrictions on black people as to how wealth may be distributed when they have only just received the opportunity to acquire wealth.

This will end up entrenching rather than disrupting racial inequality, even if the proposal by De Vos to introduce a "progressive" element to the inheritance tax is adopted.

The effect of any progressive tax policy is that taxes increase faster than income (or asset ownership in the case of an inheritance tax), with the consequence that those who stand to benefit the most from increasing their income (or assets) are punished for doing so.

This becomes important when you consider that one of the abominable aspects of apartheid was the denial of the right to pass on assets to your descendants.

Through the expropriation of property and the denial of ownership in certain areas of the country, black people were denied the opportunity to pass on their wealth to their children.

These are matters of immediate concern for poverty-stricken citizens: How do I acquire wealth and protect my children from falling back into poverty? Indeed, the concept of "black tax" emanates from these concerns.

Many young black South Africans are experiencing the reality of having to build up assets for the entire family when they start working, before they can achieve anything they want in life.

This is to ensure that their loved ones are protected once death happens.

Therefore, taxing these assets could be really unfair to a household that barely has something that was inherited.

The fact remains that the only sustainable way of eliminating poverty is through wealth creation, but this requires sacrifices.

These include sacrificing present enjoyment of your wealth to invest it in the future. This multigenerational wealth creation and transfer is essential to end poverty.

We all benefit from infrastructure built by those who do not get a chance to enjoy the fruits of their labour.

It is already unfair that black people who have to bear the yoke of uplifting their family members, in addition to all the other taxes levied by government such as the income tax, VAT, import tariffs, inflation, excise taxes and property taxes, should now be faced with inheritance tax.

However, that’s not to say black people shouldn’t pay tax, but inheritance tax will be unfair as black tax is still an issue.

Most of these people are in the position they are in because of government policy, past and present.

In that context, the complaint about a "black tax" makes sense, there's simply no space to make any sort of investment in the future. As soon as you start working, government taxes you.

As discussed above, the effect of the “progressive” income tax is to grow government’s share of your gross income faster than the rate of growth of your net income. This can only delay the escape from poverty.

As Lawrence Mavundla, former president of National African Federated Chamber of Commerce and Industry, has pointed out how the denial of property rights to black people directly led to the collapse of successful black-owned township businesses.

Without property rights, the two most important assets for many of these businesses, goodwill (the person who takes over your shop can trade on the goodwill you have developed with customers) and the property itself, cannot have their value realised and be passed on to descendants.

Assets represent property that is economically productive. Assets include property such as land, and financial assets such as shares and bonds and commodities such as gold, silver, oil and cattle.

Assets are often the product of a lifetime of work, as exemplified by the dogged determination of Richard Maponya in building Maponya Mall in Soweto, which took him 28 years to achieve.

Maponya’s legacy stands proudly in Soweto today, and is also embodied in the other businesses that he and his wife were involved in.

It is doubtful that Maponya would have embarked on such a strenuous journey if he did not believe that he could choose his own heir.

Indeed, Maponya Mall was built when Maponya had reached the age of 87.

The great man was no fool; he knew that he was building something for future generations and not just himself.

De Vos thinks that Maponya should not have had the right to decide who inherited the assets he worked so hard to accumulate by creating employment for many black people during their darkest days and for them to secure a future for their families. Maponya created an asset he left to his family.

And it matters who makes the investment. It is unlikely any government official, past and present, or any other person (otherwise they would have done it) would have had the vision and clarity of thought to build a mall in Soweto that does not require endless bailouts. It required a Richard Maponya to carry out this vision.

Taxing inheritance more heavily will most likely harm those it is meant to help.

This would be just another example of government policy harming the intended beneficiaries, an occurrence that is sadly all too common in South Africa.

This article was first published on City Press on 30 July 2020

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