When Thomas Piketty was here this time last month, he made some noise about using a wealth tax to correct the wealth inequality that has worsened since the end of Apartheid. Here are two quotes from the Financial Mail:

Piketty says SA should “introduce an annual progressive tax on net individual capital wealth, first with relatively low tax rates, so as to better monitor the evolution of wealth.”

Piketty says that in a modern economy such as SA, people should consider this kind of wealth tax as a “sort of permanent land reform.”

Well now that’s interesting – because as I’ve mentioned before, land reform (or any kind of direct transfer of assets) is problematic. As South Africa has already discovered with some of the BEE schemes that are out there – once the shares have been transferred, the shares can be sold. And what happens if those shares are sold by the recipients back to the already-wealthy? Do you have to keep repeating the re-distribution ad infinitum?

So Piketty suggests that South Africa rather use a special wealth tax for ease of ad infinite re-distribution.

The trouble is, all taxes are already taxes on “wealth”.

But I’ll get back to that, because first, I want to start with an existential question: what is wealth anyway?

The standard answer: wealth is your assets, less your liabilities, which gives you your net assets.

The next obvious question: what are assets?

The (also) standard answer: assets are things that either earn you income (eg. shares will earn future dividends), or save you money (which is just another form of income – e.g. owning a car means that you don’t have call an Uber every time you travel, which saves you time and money, which increases your disposable income).

Putting the Existential into Practice

So bearing that in mind, I’ll give you two scenarios:

  • Scenario A: I own R300,000 worth of government bonds, earning 8% interest per year (R24,000 a year, or R2,000 per month).
  • Scenario B: I receive a monthly government grant of R2,000 per month.

What is the difference between them?

In both situations:

  • the person paying the money out is identical;
  • the amount of income received is identical; and
  • the likelihood of “default” is about the same, because suspending government grants is about as politically poisonous as defaulting on government debt.

The only real difference is owning the bonds allows me to sell those bonds, take the R300,000 of capital, and do something else with it (either invest it or consume it).

So let me twist this story around a bit, and ask how high the return on those bonds would have to be before the average person won’t ever consider selling them? As a guess, I’d bet that it’s somewhere around 20% – especially if that return is going to be indefinite.

So let’s scratch Scenario A, because it’s not really comparable to the government grant, and let me introduce a third scenario into the mix:

  • Scenario B: I receive a monthly government grant of R2,000 per month.
  • Scenario C: I own R120,000 worth of government bonds, earning 20% interest per year (R24,000 a year, or R2,000 per month). The only catch is that I’m never allowed to sell them, which is why they earn such a high return.

At this point, those scenarios are identical.

Or to put it differently: a monthly government grant of R2,000 is basically a R120,000 asset*.  We can quibble about how high the return has to be in order for you to accept never selling the bond – but either way, the real point is that a regular government grant represents some kind of asset, because an asset is really just a bundle of expected future incomes.
*In technical terms, it represents a R120,000 claim on the total assets held collectively in the fiscus.

And that’s why Piketty can advise us to use a wealth tax as “a sort of permanent land reform”. Because you’re basically turning the rich into asset managers on behalf of the net recipients of the tax.

But then it begs the question “Why do you need a special tax then?” Because every tax already does that.

Taking that back to South Africa’s Numbers

So I want to go back to this table (last mentioned in How Taxes Reduce Inequality in South Africa):

Screen Shot 2015-10-27 at 7.22.23 AM

If you just look at the changes in net income, you get something like this:

Screen Shot 2015-11-04 at 12.19.47 PM

But that’s per person, so let’s extrapolate those numbers out, and rework those cash transfers into their representative asset terms (based on that 20% return):

Screen Shot 2015-11-04 at 12.19.56 PM

The change between market income and post-fiscal income is essentially saying that the net payers of tax have to “manage” a R207 billion portfolio of assets whose income will directly accrue to the net beneficiaries of tax.

Some Side-Notes

First observation – the above is valuing the asset base from the perspective of the recipient. In real life, where returns might be closer to 8%, we’re talking about an effective carve-out of around R517 billion worth of taxpayer assets.

Secondly, the above is also excluding the value of the “Free Basic Services” that form part of government spending.

So if you wanted, you could take the R993 billion worth of revenue that the government plans to collect in 2015, value that as an indefinite income stream, and at a 20% rate of return, you have an effective R5 trillion asset management program.

Because really, who do those assets belong to anyway?

PS (some caveats): I’m not saying that the current situation is wrong, and I’m not saying that I disagree with the current tax regime. I think that most of us would agree that unequal societies require redistribution. But I am saying that we need to frame the debate with some acknowledgement of what is already being done. Because WHY would you measure wealth inequality, or income inequality for that matter, without taking into account the existing policy measures that correct for them?

Rolling Alpha posts about finance, economics, and sometimes stuff that is only quite loosely related. Follow me on Twitter @RollingAlpha, or like my page on Facebook at www.facebook.com/rollingalpha. Or both.