Oxfam is at it again. With their latest report we are back to the same old mantra: wealth inequality is on the rise and the only solution is to tax the hell out of the rich.
Further reflection reveals that the solution isn’t that simple. But first, some relevant distinctions.
Wealth and income
Wealth and income inequality are not synonymous.
Wealth refers to a stock of valuable possessions – cash, shares and bonds, a house, a car. It’s also notoriously difficult to measure: property shares could be held in trusts, making it tricky to link them to individuals, and the prices of assests can fluctuate, or only be determinable once the item is sold.
Income refers to a flow of money indivduals receive, such as wages from employment.
Wealth is arguably the more significant indicator of wellbeing. This is because wealth is a means of generating further income – stocks and shares pay out dividends and capital gains, while bonds and savings generate interest. Oxfam’s recommendation for combating wealth inequality is for countries to increase taxes, specifically those for the upper echelons of society. But why is inequality a problem?
The risks of inequality
If our democracy is to live up to the value of equality of opportunity, then factors over which the individual has no control at birth should not impair basic opportunities. Currently, household income strongly impacts life opportunities along racial lines.
Also, as Jordan Peterson has pointed out, inequality ‘constitutes an ever-present threat to the stability of society’. If we look at the World Inequality Report (2017) we see that the most unequal societies are indeed some of the most volatile: Sub-Saharan Africa, India, and the Middle East.
Why higher taxes won’t work in principle
In Capital in the 21st Century, Thomas Piketty maintains that inequality is the inevitable consequence of capitalism.
His central claim is that the returns on capital always exceed economic growth. In other words, the earnings from owning capital grow faster than the earnings of labour, thus increasing inequality.
Piketty’s solution is signifcantly higher marginal income tax rates for the rich in addition to a global wealth tax. The thinking is that without taxing wealth, inequality cannot be addressed because the wealthy can simply hide their actual income. The tax must be global to block the wealthy from relocating their assets.
However, as the economist Gavin Keeton has pointed out, this strategy won’t work. The highly mobile nature of wealth will only give countries an incentive to break ranks by failing to impose a wealth tax. In so doing, this country would then benefit from incoming wealth at the expense of other countries’ efforts to combat inequality.
Here we bump up against the standard problem with socialism: it only works when everyone lacks self-interest. But we are self-interested beings – and rightly so – which means that there will always be those who rig the system to rise to the top of the hierarchy. Ironically, the very system supposedly aimed at the destruction of hierarchies creates ideal conditions for rotten ones to be born: more regulations means more government control, opening up space for corruption to flourish.
The question, as Peterson has often clarified, is not whether you have a hierarchy but which kind of hierarchy you have – a corrupt or a competent one?
Larry Summers also takes issue with Piketty’s claim that the rich always save and reinvest most of the income they receive from their wealth. Thomas Sowell has made a similar point – the top 1% of society is not a fixed layer. According to the Forbes list of the 400 wealthiest Americans in 1982 and 2012, less than one tenth of those on the list in 1982 were still there in 2012. But let’s entertain this solution for the sake of argument. Would it solve South Africa’s problems?
Why higher taxes won’t work in practice
Keeton plays out this hypothetical scenario, and the answer is a resounding ‘no’.
Income inequality has hardly changed despite extensive social transfers that, since 2014, reach approximately 16 million poor South Africans. This transfer system provides only for children from poor households, the elderly and the disabled – not the unemployed.
Inequality in South Africa is high due to high wage inequalities within the workplace as well as between the employed and unemployed.
Even more punitive marginal tax rates on the rich will not provide the government with much more by way of social transfers. In 2010, only 2.3% of South African taxpayers earned more than R750,000 per annum. These taxpayers earned 17.8% of taxable income and paid 30.3% of personal tax. If their taxes were raised to 46%, it would bring in a further R16.0 billion. In 2010, R84.8 billion was spent on existing social grants, so the additional funds would be negligible.
The way forward
The answer to poverty – which purely concerns the ability to secure basic necessities for oneself – starts with job creation.
No matter how low paying these jobs may be, without the bottom half of society earning some sort of income, poverty cannot be alleviated. However, van der Berg has shown that while employment would target poverty, it wouldn’t address inequality because of the high degree of inequality within the workplace.
To remedy this, the unemployed must gain the mobility to move into higher wage jobs. And this requires decent education. A report by Statistics South Africa makes it clear that qualitative changes to education are just as important as quantitative changes. Standards are the issue: we need highly trained, competent teachers at the basic, secondary, and teriary level, which requires proper standards of excellence across the board. Throwing more money at institutions while continuously lowering pass requirements and bumping up marks is only worsening the problem.
Evidently, a bottom-up rather than a top-down approach to combating poverty and inequality is the only way forward for South Africa. Minimum wage laws are preventing low-skilled workers from entering the market, worsening poverty. Poor education is blocking workers from earning better-paying jobs, increasing inequality. And in South Africa there aren’t enough rich people who are rich enough to take the money from.
Oxfam seriously needs to start singing a different tune – one of fewer labour laws and improved education.