This article was first published by BizNews on 31 August 2023
Time to get serious about creating black wealth in SA
South Africa’s history of racial discrimination is the justification used by the government for its race-based redress policies. Yet these policies don’t seem to have the desired effect, even though almost 30 years have now passed since these policies were first introduced. The situation has become more complex now with inequality among black people being higher than inequality between black and white people, even as black poverty has remained higher than poverty in any other racial group.
The policies adopted by the government have either done nothing to stop poverty or made it worse while simultaneously increasing inequality among black people. In simple terms government policies have elevated a few black people while making the rest worse off through increasing unemployment that is just barely covered by social grants.
As the unemployment rate increases, poverty must increase as well but social grants can be used to paper over this increase in poverty, even though the social grant is smaller than what the person would earn in a job. Instead of trying to racially engineer the economy - something that has already failed under apartheid (white people did get comparatively wealthier but less so than they would otherwise have been) and is failing now - there’s an easier way to tackle past discrimination; the government can address the problem through geography.
Think of the ways apartheid operated; it wasn’t really through race. It may seem strange to say that, but the truth is, race has no objective reality. How can you decide if someone belongs to a particular race? Do you measure the darkness of their skin? With which instrument? Yes, race has a social subjective reality that cannot be denied, but giving a ‘good’ definition of someone’s race led to absurdities like the pencil test.
Out of practicality, geography had to be used instead. Whether it was the homelands or the Group Areas Act, apartheid at its most effective had to rely on assigning so-called black people to specific places because geography has an objective reality. Geographically-focused policy along with land reform should be the only redress programmes of the government.
The government has already done some of that through the rural development programs but this is not nearly as focused as it should be. When it comes to rural areas there is a marked difference between rural areas that belonged to a homeland and are now part of a tribal trust with weak property rights and those that have strong property rights. As a start towards such a geographically-focused policy, the government could start with taxes.
As we speak, black people who grew up in and live in townships, tribal trust land and informal settlements are charged between 18-45% of their income in taxes. This makes no sense. A simple policy would be to not levy any income taxes at all for anyone who lives in a township, informal settlement or on tribal trust land. For those who went to schools in these areas but don’t currently live in them we would use the progressive income tax tables to not levy any taxes for those at the lowest income band (currently at 18%) and lower tax rates than is currently the case for the other bands.
This would also apply to companies that are based in these areas; no corporate income tax and a lower level of VAT (say 10% instead of 15%). At the same time the government should do away with labour laws for workers whose workplaces are in these areas. This would have the effect of lowering employment costs for companies who are based in these historically disadvantaged areas. All these policies would tend to attract investment to these areas.
Even better, the personal income tax policy would ensure that the wealth resulting from these investments would tend to be black. This is because the vast majority of people living in these areas are black and so by exempting them from tax, we would increase their disposable income and thus the money available to these people to save would also increase.
Consider someone who lives in a township earning R100,000 per year, this person is currently liable for R18,000 per year in tax. If the tax is no longer being levied and this person invests the R18,000 per year (R1500 per month for the first year) in the JSE for 10 years, they could have R403,000 at the end of the 10 years just from the invested money that would have otherwise gone to taxes, assuming similar returns in the JSE to the ones between 2009 and 2019 and that the person’s salary increases by 4.5% a year, the midpoint of the SARB’s 3-6% inflation target range.
Of course, a person who earns R200,000 per year would similarly have R806,000 after 10 years under similar assumptions.
Some people would use the money to start businesses or invest in each other’s businesses. The disposable income for individual workers would increase at an even faster rate. If you account for the businesses that would be incentivised to move to the townships because of the labour and corporate income tax policies, this would reduce the costs of transport for those living in those areas.
Right now, an overly indebted working township resident has to suffer regular cuts in water and electricity, they have to pay for transport to go to work and they also have to pay taxes. They do not qualify for any grants, they are expected to support their extended family, these are the people who pay the costs of our unemployment crisis through the taxes for grants, employing people in the public sector (including make-work programs like EPWP), and supporting their unemployed relatives. These are the people who would benefit the most from the policy measures proposed here.
In only a few years black wealth would increase much faster than it could have through BEE (which just creates more costs for companies through headaches like special purpose vehicles that the company has to fund and which often fail (Sanlam’s being the latest failure)). BEE also allocates wealth inefficiently to the most politically connected black people and not necessarily to the ones who are most competent at managing the wealth so it can grow and be used to create employment.
The townships and informal settlements would become the economic engines of their cities and towns, instead of being a blight on these places. All the government would need to do is catalogue and keep a database of all the townships and informal settlements. The government already knows which places are former homelands, current tribal trust land.
This is what a rational policy to encourage black wealth creation looks like. It has nothing to do with race; rather, it is laser-focused on addressing the problem as it manifests, through geography. Black people who don’t live in and have never lived in a township, informal settlement or tribal trust land are much wealthier than the average black person and since inequality among black people is higher than inequality among other races and higher than overall SA inequality, this policy would also reduce South Africa’s overall level of inequality.