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How the dead can solve South Africa's inequality

17 June 2020 7:56 PM
Tags:
Digital technology
BusinessUnusual

Deceased estates could help more than just surviving family members

We are less inclined to support a ruler that pases their authority onto a child but we do support it economically? To be fair, what you do with your money is not the same as hereditary titles, but in the same way the popularity of monarchs has waned perhaps it is time for the traditional inheritance to change too.

To quote one of the richest men in the world about inheritance, Warren Buffet thinks passing on a fortune is not the right way to go.

His advice is “You should leave your children enough so they can do anything, but not enough so they can do nothing.”

In South Africa the challenge to addressing inequality is not a lack of willingness to address the issue, but rather an inability to overcome the gap if the status quo is not challenged.

There has been progress in addressing income inequality with more people getting more fairly compensated for doing the same work. What is more difficult to address is the concentration of wealth in the hands of those that have been able to amass that wealth over generations and during a time when the majority of South Africans were excluded from being able to do the same.

Research from 2016 showed that 1% of South Africans held 67% of the wealth with 10% controlling 93% - you can’t address inequality when 90% of the population only owns 7% of the wealth.

The wealth is generally held in shares, properties and other assets. Those assets both provide income and are transferred down the generations to effectively give each successive generation a good head start on becoming successful themselves.

The intention is not to prevent someone from having the best opportunity to succeed but rather to try to give as many as possible the chance to do that.

Here is a potential path to achieve that

You should leave your children enough so they can do anything, but not enough so they can do nothing.

Warren Buffet on inheritance

Estate duty

South Africa already has estate duty that is a tax upon your death based on the value of your estate. It allows for a portion to be exempted with a tax of 20 or 25% being charged on the balance.

The proceeds go to the fiscus and are distributed as part of the state annual spending. It raises somewhere in the order of R5 billion annually.

Another tax on the transfer of assets is transfer duty each time a property is sold. That amounts to about R7 billion annually and is also added to the fiscus.

And a capital gains tax is charged when assets are sold and have appreciated above a set amount, that tax raises about R9 billion annually.

A final wealth tax calculated annually for those that have been particularly successful would also allow the state to raise funds which if applied reasonably would allow for the successful to remain that way while also raising funds to help others.

Sovereign Wealth Funds

As long as the funds are used for the annual budget they are required to be spent each budget cycle, it does not exclude being used for a wealth fund but don’t currently get used for that.

South Africa intends to create such a fund this year with the Finance Minister Tito Mboweni announcing "the proceeds of spectrum allocation, petroleum, gas or minerals rights royalties, the sale of non-core state assets, future fiscal surpluses and money we set aside. This will ensure that we continue to invest in the future generations of this country in a fiscally prudent manner", the fund should raise about R30 billion.

Using the proceeds from the taxes mentioned above in a wealth fund rather than in the central fiscus might allow for the legacy impact of inequality to be addressed by the legacy of a well run fund with a specific mandate to help South Africans succeed.

Many countries use such funds to help deal with periods when tax collection is affected or to address long term goals like infrastructure improvements.

One of most often mentioned funds belongs to Norway which diverted the significant incomes from their oil into a fund in the late 90s. Investing those funds has generated a lot more wealth for Norway than had they simply paid each citizen a dividend or cut their usual taxes. The country has less than 6 million citizens, that is smaller than the Western Cape, yet manages a fund of over $1 trillion.

South Africa already has a fund created with the pension proceeds of state employees which manages over R2 trillion in assets. Not only does it allow for retired state employees to receive a pension, the investments by the fund have helped support and grow some of South Africa's largest businesses. There have been significant issues with corruption involving the fund in recent years but it remains the largest on the continent.

The final element in the puzzle is the need to provide for those most in need. Currently this is achieved with a grant system to support those with children, disabilities and the elderly. The bulk of the 16 million recipients are to help raise children. A child that can get a fair education and live in a suitable home and get enough food is the basic building block for sustaining a society.

It does not cover everyone and so the first way to counter inequality is to ensure everyone gets a basic amount to ensure their survival. This is a universal basic income. They are prohibitively expensive and require a sophisticated system to distribute.

Setting up a transparent investment structure and have it operate for the long term benefit of reducing inequality, not sustaining political parties

Assuming it can be allowed to grow without dividend for a period, the payouts and uses might be used to cover the following.

Beneficiaries that would otherwise have inherited funds have an apportioned credit to acknowledge that while they will not receive the inheritance they will not receive anything for giving it up. The credit can be used for preferential loans for study, medical, a home or starting a business. Credits are used when loans are taken.

The primary goal of the fund is to build up enough to be able to fund the approx 42 million not currently covered by the current grant system - that is an incredible R14.7 billion per month. R176 billion per year. To help the fund get there, all citizens that opt to not take the grant get it credited towards their own estate planning tax saving. For a child that never claims it, it adds another quarter million to their estate saving.

The point of making it universal is administrative to cut down costs, but the reality is that you hope to have more not take than do, but it ensures no-one is excluded.

Assuming we doubled the current grant system which may be a fair assessment during Covid-19 then you are looking at R5,6 billion a month or R67 billion annually

Besides the safety net that it provides, it is also a useful injection into the part of the economy that most needs it as the funds will typically be spent locally on food, clothing and essentials.

There is an additional step that would both support the most vulnerable communities while also using economic activity of the most vulnerable to amplify the size and so effect of the fund. Converting stokvel savings and burial society savings via the sovereign wealth funds would add to the cash flow allowing for better returns on the sums invested while also further supporting the businesses operating in that sphere to benefit from improved systems, less waste and more regulated and fair pricing.

If wearing the most rose coloured glasses and assuming a standard for funerals that still meet the needs for paying respects but shift away from leaving families in debt or needing to invest more for a funeral than an education.

Will it work, probably not as I described and certainly not soon, but using the old adage that the best time to plant a tree was 20 years ago, the next best time is now.

Inequality will get worse if we do nothing, initially it will require a shift from white privilege to access for all South Africans, but in time the real challenge will be to prevent those that do become wealthy being the only ones that continue to do so.

The US probably created the first billionaire with the railway tycoons. We are now watching to see who and when we will have the first trillionaire? Does the world need a trillionaire while there are still those in abject poverty?

No more than we need a bunch of new royals, able to demand better services and a way of life and then passing it on by way of a fortunate birth.

While most would prefer to risk being born into fabulous wealth than poverty, there is a case to be made again that life for the children of the very rich does not have its downsides. Trying to compete with a very successful parent is not easy. Being proud of a child when you can effectively take care of everything for them might also leave parents feeling disappointed.

Some of the nastiest family feuds may begin at the reading of a will.Finally if so many of the rich would like to see a legacy of their philanthropy , what could be better than knowing your contribution fixed inequality in South Africa.


17 June 2020 7:56 PM
Tags:
Digital technology
BusinessUnusual

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