A wealth tax is not the kind of structural reform SA needs

11 May 2020
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"I just don't have time for ideological conversations at the moment," said finance minister Tito Mboweni in a recent conference call with clients of the Goldman Sachs Group. Many South Africans share the minister’s frustration. However, ideology and ideas are vital - they determine the success or failure of a country.

There have been renewed calls for a wealth tax for SA. Such a tax will only lead SA down the path of failed, misguided ideas. SA needs to get its ideas right. Failed ideologies of redistributionism (government-led "growth") should be left in the dust.

Countries that have implemented pro-freedom reforms have flourished. If it is to face the post-coronavirus world with the right ideas and policies, SA has no choice but to follow a similar path.

The purported aim of the newest iteration of the wealth tax is to place the burden of funding government programmes (and, in light of the epidemic, interventions to alleviate the Covid-19 hit), on the wealthier individuals in society. That some have accumulated more wealth does not justify the state taking more of that wealth to paper over its own destructive policies and misuse of resources.

Furthermore, SA's massive fiscal burden (SA debt burden will reach 90% of GDP by 2021) before the lockdown was caused by misguided policies and spending, such as keeping failing state-owned enterprises (SOEs) afloat. This money could have been spent directly on assisting poorer South Africans. No matter how much we tax people, we cannot spend our way out of reckless government policies and "priorities".

Wealth-tax advocates devote much focus to inequality. Inequality is not the inherently immoral concept many make it out to be. If inequality comes about through free engagement and trading value for value (as happens in free economies) it cannot be considered problematic. If inequality comes about through force or fraud, for example in socialist societies where governments control large parts of the economy for the benefit of a few well-connected elites, it should be considered immoral.

The point is that a blanket assumption that "inequality" is immoral does us no good in assessing how an instance of inequality came about.

That some have more wealth than others, does not tell us anything about how that wealth was created; whether it was done morally or immorally. A level of inequality will always occur if one wants a truly free society. A wealth tax would punish the successful for being successful. A wealth tax would also not bring about "solidarity" - solidarity on the back of government force is hollow at best.

Compared with a billionaire, a millionaire is relatively poor. Wealth is constantly shifting based on the many decisions people make. Comparing the wealth of one person with that of another shifts focus to the wrong target. The target of structural reform should be the many barriers to employment and business growth, such as the minimum wage that prices some people out of employment — not to place yet more burdens on people.

The heart of many of SA’s societal and economic problems is that millions of people are mired in poverty with little prospect of improving their lives. If different income groups can manifest increases in real wealth or income, the issue of inequality is moot.

SA's focus must shift from inequality to destitution. Millions of South Africans are destitute. They cannot lift themselves and their families out of poverty because the government continues to implement failed socialist policies that strangle and artificially restrict the more productive sectors of the economy - and make it nearly impossible for people to break into markets and find jobs.

Inequality is exacerbated in countries with restrictive policies and high taxes. Restrictive labour policies, for example, make it difficult for people to find jobs. Bigger firms, with massive legal and compliance departments, are favoured in such environments. Those who have the resources for red tape, do not mind if there is more red tape constricting any potential competition. 

The government's abysmal record

The government can do meaningful work for smaller firms if it significantly cuts down barriers to employment. It deserves mention that, after more than a decade of looting and mismanagement of state resources, many South Africans would be concerned that the billions raised will be "spent" on the wrong things, no matter how many assurances they receive from the government.

The SA government has an abysmal record in terms of tracking spending and a stellar record in terms of the misallocation of resources.

For the government to have more room to spend the tax revenue it has collected (much of which has been squandered), there should be a significant reduction in how much officials, ministers, and MPs are paid. As many taxpayers are currently struggling greatly, such a move would be most welcome, and indicate that those in the government take seriously the taxes with which many South Africans struggle but continue to pay.

All sectors of the taxpaying public, low, medium, and high, keep SA afloat.

Before Covid-19, SA was operating under home-grown and global constraints. We have tried the path of wealth redistribution. Before the pandemic, growth hovered between 1% and 2%. The economy is currently being lowered into the ground - we dare not add yet more weight onto the coffin.

A wealth tax will only discourage capital formation, without which no new business will be created. A wealth tax can only focus on the fixed "amount" of wealth currently in a country. But this view inhibits imagination in terms of individual wealth creation - something we are all capable of, and which we should all be free to pursue. We need to adopt the approach of encouraging more, not less, wealth creation and accumulation.

Wealthier individuals always seek new opportunities for investment, and small businesses cannot begin, never mind grow, without significant investment.

People deserve a chance to make wealth for themselves - this should be SA's future path. Let the world see that we are serious about structural reform, that we will promote proven polices that lead to greater levels of economic growth and, most crucially, job creation.

This article was first published on BDLive on 08 May 2020

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