Now is Precisely the Wrong Time to Contemplate an Inheritance Tax

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COVID-19-afflicted South Africa is suffering. The effects of the novel coronavirus have been exacerbated by one of the strictest government-imposed lockdowns in the world. An economy that was battered and bruised by controlling, growth-killing policies before lockdown, might well be on its last breaths. Many poor people in South Africa, the overwhelming majority of whom are black, have had their limited economic freedoms summarily stripped from them. I would contend that any talk now of pursuing the same policies as before, and adding yet more difficulty on people in the form of an inheritance tax, is deeply misguided, and would not do anything to aid in the work that South Africa must do: removing barriers to wealth creation, long-term investment, and capital formation.

The latest call for an inheritance tax in South Africa comes from Pierre de Vos.

At base, an inheritance tax falls into the same trap as calls for higher taxes.I It presumes that inequality is a moral problem that the government must be empowered to solve, and secondly that wealth can only ever be fixed and ‘exchange hands,’ as it were. An inheritance tax undermines those people who worked hard for generations to leave something for their children, and lumps them into the same category with people who squander the millions they may inherit. Blanket approaches to morality, such as this, do not rest on a solid basis.

De Vos argues that “the unchecked transfer of wealth between generations is an injustice in and of itself”. For the concepts of justice and injustice to mean anything, one needs to able to apply them to the actions of an individual; judging, for example, whether someone has attained wealth through creating value, trading and investing, or whether they took wealth from someone else. ‘Justice’ rings hollow when we just assume that all inherited wealth was either ill-gotten or will always be ‘wasted’. It is not for us to determine whether someone else uses the wealth they inherited in an ‘acceptable’ way. The charge of injustice is here applied across the board to all inherited wealth, both wealth earned, and wealth taken. What is definitely an ijustice, is for the state to take from some simply because it decides their wealth is ‘un-earned.’

South Africans work incredibly hard to build some measure of success and wealth for themselves, and moreover for their children and grandchildren. Calling for an inheritance tax makes light of the work and sacrifices of decades that came before. With similarly disempowering effects that would accompany the seizure of people’s pensions, for example, an inheritance tax would place control of people’s earned wealth in the hands of the state.

We must cultivate a culture of building and growing, of investment, of strengthening one’s roots in this country. An inheritance tax adds another reason for people to leave South African, to create wealth elsewhere. People here are already grossly over-taxed. The taxes that are paid, are most assuredly not used efficiently, and instead, as we saw through the era of state capture, squandered. What tax revenue is collected, is wasted on failing state-owned enterprises, or government schemes and policies that inevitably run way over budget. Hard-working South Africans’ resources are in the main not used to benefit people who still bear the consequences of socialist destruction wrought by the Apartheid regime.

Heading out of this global pandemic is exactly the right time for us to abolish the ideas and policies that crippled the economy, and most crucially people’s lives, before COVID-19 hit. For the most part, the government has paid mere lip-service to the concept of radical economic transformation: There is nothing revolutionary about increasing state power over people, and punishing wealth creation and investment through all manner of taxes.

Shall South Africa be a country where the government has the power to determine what individuals may do with the fruits of their work, or a country where we accept that people will create different levels of wealth, some will choose to handover that wealth to their children?

One of the most beautiful, empowering aspects of the free market is that, when people are left as free as possible, wealth is created. Wealth is not a fixed amount. A country does not have a fixed wealth cake that the government of the day can divide up as it sees fit. Each of us, through trying work, create value. However, when a country drifts in the direction of high barriers to employment, high taxes, crippling government debt, and other incorrect, immoral policy decisions, we should indeed become concerned that the wealth in a country could become fixed, and that only some will enjoy the benefits thereof. This is precisely why we should do everything to push back against a growing concentration of state power.

The freer a society is –the true meaning of freedom requires a free market – the more individual people can pursue different goals, careers, and other forms of work. A free market is predicated on the foundation that people should be free to interact with each other without anyone else, and especially the government, interfering in those free choices.

The more government moves in the direction controlling more aspects of people’s lives, I would agree with De Vos that wealth becomes fixed. Different individuals and groups vie to control the various levers of power, and the more restricted people’s economic freedom, the more they have to rely on the state (either directly or through political connections) to obtain any modicum of ‘wealth.’

Let me for a moment leave my moral concerns regarding taking other people’s wealth because we deem it ‘illegitimate.’ The government has shown the South African people time and again how little it thinks of the work they try to do, and the taxes which they try exceedingly hard to pay.

Given the abuses and interferences in people’s lives committed by the Apartheid government, and the government’s constant attempts to control people since 1994, we cannot be surprised that so many people don’t have work. Ours is not an environment conducive to economic growth, as we vilify success, wealth creation, trade, and entrepreneurship at every opportunity. And, when some among us decide a certain category of wealth is not ‘legitimate’ – the standard by which to measure is never clearly defined – the government becomes only too eager to interfere. The more some people accept that the government should ‘step in,’ the wider we open the door to corrupt and authoritarian inclinations to take hold.

Talk of new taxes, in this regard on inheritance, completely shifts our focus, and indeed the broader debate around reforms and new ideas for South Africa, to the wrong target. An inheritance tax is not going to remove high barriers to employment. It is not going to fix the unreliable electricity supply, or make it easier for small businesses in townships to access funding. All of these and many other additional hurdles prevent South Africans from creating wealth for themselves, their families, and their communities. An inheritance tax may be chic now, but implementing it does nothing to alleviate South Africa’s many blockages to economic growth.

If we are truly serious about radically transforming the economy, we must place control and agency in the hands of South Africans themselves, not in whomever happens to be the President of the day or the government-appointed committee presumed to have the knowledge and insight to decide on behalf of individuals, what should be done with the wealth they have created.

Many people will make decisions about their wealth with which many of us disagree. But the fundamental point is that in a free society, we should be comfortable with that.

To make freedom a more robust, and ultimately meaningful idea, we must realise that it is for individuals to decide what they think is the best use of the wealth they have spent years working for and creating.

On this point, De Vos writes that:

“Those who claim they believe in an ’equal opportunity society’ – in other words, a meritocratic system in which individuals get ahead based on their own talents and efforts – should in theory support efforts to curtail inheritance rights as inheritance is gifted, not earned.”

A robust conception of individual freedom would allow us to accept that people should be free to give the wealth they have created to their children, or place it in a trust, or give it away, or whatever else. The point is not whether the recipient deserves that inheritance; the point is that it is completely right and moral for the creator of that wealth to freely choose what to do with it.

The kind of equality we should want can never be enforced through the force of government; equality in the eyes of the law, equality where people are free to trade with each other and live their lives can only come about through the free market. We cannot attain freedom if we want the state to intervene and ‘make’ people perfectly equal.

Free markets bring with them the benefits of trade, of specialisation, of lower the costs of goods and services that in previous decades were the purview of kings and queens, and they also bring the fact that some people will attain more wealth than others. Inequality of this kind is a by-product of freedom, and most assuredly not something we should be concerned about.

An inheritance tax presumes that those with political power should have the privilege of deciding for people what shall be done with the wealth and value they spent their lives creating and working for. When will individual freedom and the concomitant economic freedom become, not a privilege, but a right for all South Africans, protected from interference by any government?

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