STUART THEOBALD: Inheritance tax proposal pokes a hornets’ nest

There are important moral and practical concerns that should guide the discussion on whether to disrupt multigenerational transfers of wealth.

This column was first published in Business Day

Last week Pierre de Vos, a law professor at the University of Cape Town, published a blog raising the possibility of a 100% inheritance tax. The response, on Twitter anyway, was outrage.

His concern is the role of inheritance in driving intergenerational inequality that contributes to the stark racial inequality that has been highlighted by the Black Lives Matter movement worldwide. There is obvious resonance in SA.

Well, the professor poked a hornets’ nest. The torrent of abuse on Twitter was something to behold, including from occasionally sensible professionals. There were some voices of reason, particularly a rejoinder from Deon Gouws, chief investment officer of Credo Group, who pointed to the practical difficulties of the proposal, but the emotional outpourings dominated reasonable discussion.

To be clear, there is no proposal on the table for such a tax. The last time estate duties were properly considered was by the Davis tax committee in 2016. It recommended that the amount you can inherit tax-free should be increased from R3.5m to R15m. But it also advised the implementation of a higher 25% duty on estates in excess of R30m (20% below), and that the “abatement” for inheritance by spouses should be abolished. The committee was concerned with the unfairness of estate duties applied to married spouses compared to unmarried couples. The National Treasury accepted these recommendations only in part — the duty on estates over R30m was increased to 25%, but the tax-free amount stayed at R3.5m and a transfer to a spouse at death remains tax free.

The way estate duty is done in practice reflects awkward moral and practical compromises.

De Vos’s fundamental point is surely clear to anyone. There is something unfair about disparities in wealth that reflect only who your parents were. Given our history of racism and its effects on wealth accumulation, that base unfairness is compounded by the fact that it perpetuates racial inequality of the past.

Philosophers throughout history have worried about this. In Plato’s ideal republic, children would not even be raised by their parents (indeed, they wouldn’t even know who they were), to prevent the unfairness that results from relative qualities of parenting, never mind inheritance.

The abolishment of inheritance was part of Marxist thinking too, though it followed as a natural consequence of the abolishment of private property. Marx thought trying to abolish inheritance tax itself would be a “foolish” distraction.

Many on the Right also thought inheritance is unfair. Ayn Rand, for instance, abhorred unearned wealth and thought family had no claim on your assets. The transfer of wealth across generations is feudalism rather than capitalism. Of course, thinkers on the Right don’t think estates should be taxed but do agree there should be no special claims or rights given to children who should work for their own wealth.

Moral views opposed to this abound. There is a basic property rights defence. Your wealth is, at least to some extent, the result of hard work and choices to save rather than spend. You are free to spend what is yours as you wish, and that should include giving it to your children. In contrast to Plato, we see the preferential relationship between parents and their children as the one exception to the Kantian maxim to act as you would want others to act towards you. Most of us see a parent’s desire to give their children the best lives possible as an admirable thing. Indeed, divorce and custody law reflect not just a tolerance of this, but an expectation of it. The idea that a death might result in children losing their homes strikes most of us as abhorrent.

Many also think there’s nothing wrong with families accumulating multigenerational wealth. Plenty of us would rather direct our custom to a “family-owned business” than a corporation. We could not have such things if businesses could not be passed on to the next generation.

There is also an economic argument. If you could not leave assets to family, many would choose to spend the wealth instead. That would reduce savings, particularly the kind that finances long-term investments that are essential to expand an economy to create wealth for all.

There are also practicalities that are important. Much of the inequality that De Vos sees transferring between generations stems not from wealth but from intellectual and social capital that families endow in their children. So, an inheritance tax, even if it were possible to implement, might do little to solve the problem that De Vos is concerned with. Hence Plato’s more radical proposal.

As Gouws pointed out, the practicalities of such a tax also have to contend with the many loopholes and ways around it. An army of tax practioners would welcome the fees to create new structures for clients. Parents who deeply want to leave assets to their children can find myriad ways to transfer assets to their hands before they die, not least through emigrating.

The awkward compromise we have now — an estate duty, but not too much, exemption for spouses, but not too much — reflects the clashing of all these different moral instincts and practical concerns. Twitter, however, is no place to air them.

Theobald is chairman of Intellidex.