South Africans are often reminded that incomes in SA are the most unequal in the world. We are as often told about the grave issues of poverty and inequality that confront the economy; as if inequality in SA causes poverty.
But does it? And may not less inequality (engineered by policies to tax the rich and give more to the poor) well lead to slower growth over the longer run, to the disadvantage of those in the lowest deciles of the income distribution? Less equal incomes or wealth (when tolerated) may well lead to a significantly better standard of living for the (relatively) poor.
Poverty is a very obvious problem for any society. So is inequality – regardless of the causes of the income or wealth inequalities (that are poorly understood). Yet irrespective of the process of income and wealth creation and how well (usually how badly) this process of income generation is understood, large differences in the standard of living inspire resentment and envy in many. This unhappiness (call it jealousy if you like) inspires economic policy interventions that take from the wealth and incomes of the better off. Such actions, while often very popular, may well mean more (rather than less) absolute poverty over the longer run.
Differences in incomes cause no economic disadvantage to the less well off. Instead they will be to the advantage of the poor when they are the rewards for superior economic performance. Examples are the incomes earned from owning or managing a successful enterprise or for that matter practising a profession; or even running a successful not for profit organisation but one that pays excellent employment benefits. These firms, of one kind or another, deliver valued goods and services to willing buyers and / or jobs for willing workers on mutually acceptable terms to buyers or sellers of goods or services, labour or savings (capital).
Fair exchanges that make some rich and others much better off than the average is not robbery or exploitation. These differential rewards also provide the essential incentives for the enterprising sorts to take risks with their capital and labour, to save and invest more and for managers and workers to work harder and more effectively (at home rather than abroad).
Those who succeed in a competitive marketplace are not rich because the poor are poor, as they would have been the case in Tsarist Russia or pre-revolutionary France, where the aristocracy repressed the incomes of the serfs or slaves on the land and consumed the surplus, sometimes leaving behind great palaces or cathedrals for us to admire. Great generals could become rich beyond the dreams of avarice, looting the wealth of their defeated opponents and selling their captives on the slave market. The wealth of Rome and the title of Caesar that came with it were earned on the battlefield. The above average incomes in SA are also mostly earned in competition for the budgets of households or other firms. And when they are not fairly earned – the result of corruption or theft – the legal solutions are obvious enough even if not applied with all the rigour they deserve.
But while incomes earned in South Africa may well be the most unequally distributed in the world – the distribution of expenditure is much less unequal. The World Bank shows, in a recent study, that South Africa does more to redistribute income in cash and kind to the poor than its developing economy peers with similar average incomes , Armenia, Brazil, Bolivia, Costa Rica, El Salvador, Ethiopia, Guatemala, Indonesia, Mexico, Peru, and Uruguay (South Africa Economic Update Fiscal Policy and Redistribution in an Unequal Society, World Bank, November 2014).
As the study reports:
“South Africa ranks as one of the most unequal countries of CEQ (Commitment to Equality Methodologies applied by official statisticians in income measurement) participant countries, if not among all middle-income countries, given its Gini coefficient of 0.69. The proportion of the population living in poverty at 33.4 percent measured by the international benchmark of $2.50 a day(purchasing power parity, PPP, adjusted) — is also higher than in many other middle income countries with similar levels of GNI per capita. For example, the poverty rate is 11 percent in Brazil and 4 percent in Costa Rica.
“Briefly, this Update has two main findings. First, the burden of taxes falls on the richest in South Africa, and social spending results in sizable increases in the incomes of the poor. In other words, the tax and social spending system is overall progressive. Second, fiscal policy in South Africa achieves appreciable reductions in poverty and income inequality, and these reductions are in fact the largest achieved in the emerging market countries that have so far been included in the CEQ. Yet despite fiscal policy being both progressive and equalizing, the levels of poverty and inequality that remain are unacceptably high. South Africa is currently grappling with slowing economic growth, a high fiscal deficit, and a rising debt burden. In this context, addressing the twin challenges of poverty and inequality will
require not only much-improved quality and efficiency of public services but also higher and more-inclusive economic growth to help create jobs and lift incomes.” (p22)
As a result of these tax-and-spend interventions the distribution of spending power in SA is significantly more equal than that of incomes. Understandably since most of the poor earn minimal incomes, because they are mostly unemployed, or at best informally employed, and where incomes are not easily recorded.
The issue for economic policy in South Africa is how much more can be taken from the high income earnings off to give to the poor without undermining the prospects for “higher and more-inclusive economic growth to help create jobs and lift incomes” as the World Bank has put it.
The answer to this seems obvious. While it may be possible to raise more tax from the economy, realistically this could only be achieved by broadening the tax base, not by raising the income or capital gain or wealth tax rates on the top two income deciles. The imposition of higher tax rates on the high income earners would achieve little by way of extra collections; more important it would undermine the incentives of the high income earners to deliver more taxable income. One should rather encourage economic actors in ways that would stimulate economic growth and increase the tax base to in turn provide more poverty relief.
In other words, if the objective of economic policy is to increase the ratio of taxes to GDP, this must mean making the SA tax system less rather than more redistributive – that is by increasing VAT or increasing other expenditure tax rates, or by adding to the payroll taxes on all formal sector employees, which is the most obvious place to look for extra revenue. Income redistribution without growth appears to have reached a limit.
Controlling government expenditure – limiting the government’s share of GDP so that the overall burden of taxation can be minimised and economic growth encouraged – is essential. This means, in practice, strict limits on the employment benefits provided for public sector employees. These benefits account for the bulk of the measured welfare transferred to the poor in kind rather than cash, such as educational and hospital services. Spending on the poor is judged by the World Bank to have made the distribution of income in SA more equal. As the Bank remarks it does not judge the quality of such services, only its cost to taxpayers which is taken as its value.
It has been such extra government spending on its own employees that constitutes the main threat to the welfare of the SA taxpayer. These officials are to be found among the higher income deciles. Ironically therefore these improved benefits for a largely transformed public sector will have added to the inequality of earned incomes in SA. Without good delivery, much of the welfare budget will be wasted even if the income taxes collected to fund government spending reduce income inequalities as these are measured.