Do startups make inequality inevitable?

SAY “PG” in South Africa, and everyone knows you are talking about Finance Minister Pravin Gordhan. In the tech start-up world the initials belong to Paul Graham, a venture capitalist and influential essayist. Recently, he controversially argued that economic inequality is a necessary consequence of start-up success. “You can’t prevent great variations in wealth without preventing people from getting rich, and you can’t do that without preventing them from starting start- ups, ” he wrote. Although written in the context of a debate on changes to the tax system in the US, Graham’s words must give us cause to pause. South Africa’s National Development Plan argues that “mass entrepreneurship” will contribute to higher employment, lower poverty and increased social mobility. It also argues for a more equal society, and focuses on equalising opportunities. But are we attempting to reconcile two irreconcilable goals —growing entrepreneurship and lowering inequality?

Inequality is good and bad?

He argues that inequality has good and bad elements, and governments and society should amplify the good and reduce the bad. He s ays arguments against rising inequality are simplified and conflate everything into a single argument. This perspective has many adherents in the American tech start-up space but is embraced by a minority here. For example, Uber employs no one, and drivers have no stake in the company. Some see this as the internet enabling progress. But work is redefined and precarious employment increases. The debate piqued my interest because tax reforms for small businesses in South Africa are imminent, and we often mimic inappropriate developed-country solutions.
Vast inequality is not inevitable, nor a requirement for progress. In responding to Graham, Nobel laureate Paul Krugman shows that the top 1% in the US are not entrepreneurs but corporate executives. Thomas Piketty also makes this point consistently —the top 1% earn from inherited wealth, which requires little investment and contributes little to job creation and wider social outcomes. In South Africa, high levels of inequality go with low private sector investment.
Our financial institutions have been criticised for underinvesting in the economy despite the availability of money, and BEE deals for not creating new invest ment. According to Stats SA , large companies receive the bulk of government subsidies and grants. The recent World Bank Sector Study of Effective Tax Burden  [PDF] in South Africa shows that large corporations generally pay less than the 28% r at e for companies due to a complex system of government subsidies and tax planning. It raises the question of whether government subsidisation of large business can be restructured to support higher levels of employment.

What should Pravin Gordhan do?

So what should our own PG do? The Davis Tax Committee recommendations on small business taxation should be speedily implemented. For start-ups, more ambitious approaches are needed. The popular option is to provide start-ups and all small business with three tax-free years. The rationale is easy to follow —establishing new businesses would be encouraged, and once successful, the businesses would start paying tax and provide jobs. One needs to understand why there is such a low take-up of tax concessions for venture capital activities. In South Africa this differentiation between small and big business is important, as their interests often conflict. We can learn from the US debate on how tax impacts start-ups that inequality matters and that government policy matters in how markets functions. The wider question remains in South Africa: can we create mass entrepreneurship as envisaged in the NDP without tackling the underlying inequality of opportunities? Our PG can make a good start by prioritising tax reforms for small businesses.
Hassen is the editor of a student at the Wits School of Governance
This article first appeared in the Business Times (Sunday Times) on 14 February 2016.

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