01:26 am
29 October 2016

Will the Poor Win if the Rich Lose?

THE VISIT of the fashionable French economist Thomas Piketty has reminded us that SA is one of the most unequal societies in the world, as measured by the Gini coefficient, named after the Italian statistician who developed the methodology. It is this kind of statistic, used to construct a global league table that shows us as incontestably the worst in the world, or at least the worst of the countries capable of producing credible measurement. It’s this measure which lies behind the remarks we hear about SA living on a “time bomb” or “storing up revolution”.

Behind these predictions seems to lie the vague belief that if consumption by the wealthy is conspicuous and contemptuous, it will inflame the poor — hence, to put it simplistically, the French and Russian revolutions. The converse of this is less often discussed. What if wealth is discreetly employed? And assuming the poor are aware of the Gini coefficient and its measure that renders SA the most unequal society in the world, would they feel worse about themselves?

Income distribution is not actually in itself an indicator of social, economic or political crisis. The focus on the Gini coefficient is misleading. To take two important measures: as a result of the tenfold rise in the number of individuals qualifying for social grants to more than 18m, and the extensive extension of water and electricity provision, in absolute terms many more South Africans are substantially better off than was the case 20 years ago.

In addition, the Gini coefficient is a relative measure, not an absolute. Consequently, it allows the paradox that inequality of income can rise, even as levels of poverty are decreasing.

In any case, taxing the very wealthy should not be motivated by a desire for retribution or direct redistribution, but should be based on a fair application of redistributive justice and that rests on subtle calculations of tax efficiency. Once a tax becomes prohibitive — it is so high there is no incentive to make more money, and individuals or companies emigrate to avoid being taxed — then it is counterproductive. Lower tax rates encourage economic activity, which in turn generates more actual tax revenue than at the higher rate.

Making the rich less rich does not make the poor richer, except if the resulting tax revenue is diverted to support significantly improved social services. But the statistics that gave SA the highest Gini coefficient in the world also indicate that a Robin Hood approach will not have the desired effect. There are too few really wealthy people in SA, relative to the population, to make a difference.

Piketty recommends an additional wealth tax in SA, but a mild progressive one that starts with very low percentages. This might shift us a little way up the Gini league table, but it would certainly make no difference at all to the lot of the poor and unemployed.

However, Piketty’s real agenda here is not fiscal but philosophical. “The big advantage of an annual tax on wealth,” he says, “is that it would produce democratic transparency about wealth and we would know more about who owns what in SA and how this is changing over time.”

Like other experts, Piketty says the solution to inequality is “sustainable and equitable growth”, which in turn depends on “a well-functioning public education and health system, and SA should go in this direction.”

But perhaps Piketty is not aware that SA is already attempting to fix public education and health, and that vast amounts of money are already being thrown at these departments. In fact, the problem is not money, but bad management in the civil service, of both people and projects. This is not essentially a problem to be solved by the fiscal authorities — it’s a problem to be solved by the functional authorities. And, as it happens, there are ways in which business can help, and is helping, in this process.

Our biggest economic, social and political problem is not so much income inequality, but unemployment. That will in no way be alleviated by additional taxes on the wealthy, seductive as such taxes may be in assuaging the visceral resentment common among leftist romantics, but by sensible business-friendly policies.