We Can Not Eradicate Income Inequality Without Addressing Wealth Inequality

Staff Writer | The Republic Mail

If Jan Van Riebeeck kindly ‘gave’ your great-great grandfather a farm and that farm is still in the family, the money will keep on flowing in – forever; writes Johan H.B. Raubenheimer.

A lot has been written about South Africa’s staggering income inequality. According to World Bank data, this country has the highest Gini coefficient in the world (with the exception perhaps of the island state of the Comoros).

So what is this Gini Coefficient thing that is so often mentioned in the news?

A Gini coefficient of zero would indicate absolute income equality, i.e. everyone earns the same. The closer it gets to 1, however, the higher the income inequality becomes. Ours is between 0.63 and 0.70 ( depending on who measures it) – compared to e.g. countries such as Norway, Sweden and Denmark where it is well below 0.30.

This simply means that the bulk of income earned in South Africa goes to relatively few people, while millions of our people have to live on near-starvation wages. The fact that this inequality runs largely along racial lines is a dead giveaway that Apartheid South Africa is alive and well, despite the laws not being on our statute books any longer.

The Link Between Wealth and Income

But what are the underlying reasons for this income inequality? In this article, I will highlight the massive role that ‘old money’ or inherited wealth plays in this regard.

And this is where the manure really hits the fan. Our wealth inequality is much, much worse than our income inequality. The richest 10% of our population own between 90% and 95% of all wealth in this country. And here again the vast majority of the wealthy just happen to be white.

Now you don’t need a PhD in Economics to understand that rich people never have to worry where next month’s grocery money will come from. Wealth in itself provides a regular, reliable income. You can invest your money in property and earn rent. Or you can buy shares and earn dividends, or buy a business or a farm and earn even more.

The more wealth you have, the higher your income will be, full stop.

Secondly, your children and their children can keep on earning that income for generations to come. So if Van Riebeeck kindly ‘gave’ your great-great grandfather a farm and that farm is still in the family, the money will keep on flowing in – forever.

The same goes for our mining industry, our banks and our manufacturing industry. All that ‘old money’ is ensuring a steady flow of income for their rich and mainly white owners.

The solution?

We will never solve our massive income inequality problem with measures such as minimum wages or ‘regular’ income tax. These are merely ways to address the symptoms, not the causes. The only solution is to tax wealth and the income on that wealth much more heavily.

In South Africa tax on investment income only makes up about 1% of our total taxes. When we look at inheritance tax it’s even worse – here the contribution is only 0.1% of the total.

I want to argue that if our government is serious about Rapid Economic Transformation it should increase these taxes dramatically. There is absolutely no justification for someone whose great-great grandfather was handed a farm or a mine on a silver platter by some or other colonial master 300 years ago to live the good life into perpetuity while millions of our people go without a proper roof over their heads.

Start by doubling the current inheritance tax rate, and keep on increasing it every year. And do the same with tax on investment income.

Eventually inheritance tax should ideally be 100% – in other words you can enjoy your wealth while you live, but afterwards everything should go back to the society in which your were born.

The alternative is to simply expropriate these assets without compensation, something which Finance Minister Gigaba’s adviser, Professor Malikane, is a big proponent of.

Johan H.B. Raubenheimer (@Raubies) is an activist, entrepreneur and freelance writer from Cape Town, South Africa. He has a B.Com(Hons) degree and a financial background.