French economist Thomas Piketty. (AFP) ~ AFP
French economist Thomas Piketty’s lengthy treatise “Capital in the 21st Century” has earned him equal measures of praise and criticism. Like its similarly named predecessor, Karl Marx’s “Capital”, its conclusions appeal to the optimistic side of human nature so, not surprisingly, have been trumpeted by the political left.
Indeed, on the strength of ideas in his book, The Economist magazine described Piketty as the “Modern Karl Marx”. Chartered accountant and occasional Biznews correspondent Riaz Gardee attended Piketty’s UJ lecture in Soweto on Saturday.
As you’ll read from his excellent summation, Gardee warmed to much of what the rock star economist had to say. So would anyone with compassion for their fellow man. But once we get past emotion and self-righteousness, the crux of all this is whether resources are best applied in the common good by those who accumulate them, or by those who would requisition those assets through taxes and levies.
Billionaires Bill Gates, George Soros and other modern philanthropists regularly opine that it is more difficult to efficiently distribute their wealth that it was creating it. Anyone can spend money, especially if it was earned by someone else. The key to progress, though, is doing so efficiently. – Alec Hogg
By Riaz Gardee*
The best-selling French author of ‘Capital in the 21st century’, Professor Thomas Piketty, presented the 2015 Nelson Mandela lecture to a packed audience of over 2000 guests at the University of Johannesburg’s Soweto Campus on 3 October where he highlighted the ineffectiveness of BEE in reducing inequality.
Who is Piketty?
Professor Thomas Piketty is a French economist who specialises in understanding concentrations and inequality of wealth using 250 years of data to support his arguments.
His conclusion is that concentrations of wealth arise mainly due to the rate of return on capital (r) exceeding the growth in the economy (g); where r includes profits, dividends, interest, rents and other income from capital and g is measured in income or output.
READ: Matthew Lester: Thomas Piketty’s Inequality 101 (Wealth taxes) – no easy solution
Another way of simplifying this is that salaried earners who would typically receive annual inflationary increases would over time fall behind owners of capital who obtain a larger rate of return thus creating permanent inequalities.
More importantly his argument is that this inequality is not accidental or self-correcting but a feature of capitalism which requires state-intervention to be reformed.
If it is not reformed it will threaten the very foundations of democracy due to these wealth gaps which are permanently entrenched and in order to correct this a global progressive wealth-tax is necessary.French economist Thomas Piketty
In his lecture Professor Piketty maintained that his objective was not to provide a ‘magic bullet’ but rather to contribute to informed democratic discussions where everybody could look at the data and draw their own conclusions on inequality, income, wealth, public debt and capital. Economics should not be the preserve of a few specialists.
Inequality is very high in South Africa and has been rising over the last 20 years. If it is not addressed through peaceful democratic means than there is always a potential for violence.
READ: Piketty blames apartheid for SA’s high inequality
Furthermore these inequalities are not good for development and growth. The increase in inequality has been due to the legacy of apartheid, inadequate government interventions and international factors.
The South African revolution brought equality and formal basic rights, which are important, but that is not sufficient to attain equality. If you are unable to pay rent or housing it affects the right to move making it a very limited right. In order to have effective rights people require:
• The right to labour for a decent wage with a national minimum wage;
• The right to high-quality education together with the right to adequate public infrastructure including transport;
• The right to well-functioning public health system;
• The right of access to property; and
• The right to economic and political democracy including worker participation in company boards
In South Africa the repression of apartheid with its purposely discriminatory practices restricting education, limiting movement and right of ownership was bound to result in drastic levels of inequality. The share of total income currently going to the top 10% of income earners in SA is 60-65% of total income with 50-55% in Brazil, 45-50% in the US and 30-35% in Europe.
This suggests 10% of the population, largely white, is far removed from the rest of the population. Some people ascribe this to high unemployment but unemployment is rather a symptom of inequality as a result of unequal skills and restricted access across the territories.
The international factors, which were out of the control of the SA government, were financial de-regulation over the last 25 years, the fall of communism in 1990 giving rise to a new era and rising commodity prices during this period.
The international community thus has a large responsibility for the situation of inequality in South Africa with Europe having a direct responsibility for apartheid and therefore some of the solutions should be driven by them. The most important finding was that market forces cannot be relied upon to self-correct the inequality.
The reduction of inequality in North America and Europe in the first half of the 20th century was due to large shocks like the two world wars and the great depression which made the elites accept fiscal and social reform, including progressive taxation.
Elites will always justify the system from which they benefit. BEE transactions, mostly voluntary, have also not been successful in reducing the inequality and wealth concentrations.
Increased wealth transparency is required in SA to determine who owns what so effective decisions can be made. This can be initiated with annual wealth taxes as low as 0.5% for assets over R10m in order to produce greater transparency. Trusts should therefore also be subject to this annual tax.
READ: Piketty suggests wealth tax for SA
Multi-nationals and wealthy citizens should pay their fair share of taxes with a much greater responsibility on multi-nationals disclosing the amount of taxes paid in countries where they do business. Europe and North America should also accept the creation of publicly owned global registries of wealth to allow greater transparency and information. These registries already exist where electronic records of ownership title are held but are privately owned.
Needless to say his arguments have sometimes drawn the ire of those seeking limited or no state intervention and even sometimes portraying him as ‘anti-capitalist’.
This is far from the truth as Professor Piketty is in favour of free market principles and has no aversion to wealth acquisition or accumulation. The main point of departure with concentrated wealth is that he seeks state intervention via a progressive tax system based on transparency and access to information.
His progressive wealth-tax proposals are not as radical as some would portray or others would prefer. Far from suggesting large scale wealth transfers or ‘expropriations’ he proposes a progressive scale of wealth tax up to 2%.
A 2% annual tax on the worlds 1% richest would generate over $4trn per year using Forbes estimate of their wealth of $110tn. Progressive wealth tax systems are also hardly a new concept and has been part of many ideologies and systems.
Interestingly Islamic scholars have been proposing a progressive annual wealth tax of 2.5% for over a thousand years.
Business leaders have expressed their scepticism to Piketty about the capacity of SA’s government to deliver on his proposals. Access to education by the poor is far from world-class. Setting a minimum wage would require strong controls against illegal immigrants or factor their presence into the wage rate.
South Korean economist Ha-Joon said ‘the taxi industry in South Africa is run by gangsters impacting on the poor’s right to transport. Corruption also renders increased tax collection ineffective. Previous tax commissions in SA also believed a wealth tax was not necessary due to other taxes levied.
READ: Newsmaker: Thomas Piketty – capital and critics
The tax system is complex and needs to be understood with relevant wealth data to make informed decisions. The Davis Tax Committee is currently reviewing the SA tax system. The task to redress inequality will be challenging but as Nelson Mandela said ‘It always seems impossible until it’s done’.
* Riaz Gardee is a chartered accountant who specialises in mergers and acquisitions and corporate board advisory. He has authored numerous financial articles and columns across various publications.
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