Taxing a gain that wasn’t there
The idea behind the capital gains tax is simple: tax any gains on the increased value of capital, as the increase of capital was due to a better performing economy. Whether the capital is in the form of shares or property value, it has benefited from a growing economy, and therefor the value of the capital has risen. The taxes would fall disproportionately onto the rich because they have the excess capital to invest. That sounds like a just idea, but is it?
Like so many other countries, South Africa fell over their feet to implement capital gains tax. After all, it would raise more money, which the government could use to fund their social upliftment programs and infrastructure spending. They have raised over R100bl since it was introduced in 2001. During the boom years, there was not much pushback, as it only seemed fair that the capital, that was invested in the South African economy, benefited from the strong growth. As governments invest more into public goods, such as roads, schools and hospitals, private capital benefits by being in the vicinity of it.
But now in leaner years, one should question the merits of Capital Gains Tax. The problem is that it is calculated on the nominal value of the increase (the nominal value includes inflation). In countries like the USA or Europe, this is not much of a problem, because their inflation rate is about 1-2%. Our inflation rate is three times higher at about 6%, but our economic growth is much lower than that in the West. The increase is capital value is almost all due to inflation. Why should the investor pay a tax on a gain that has not really been a gain at a ll. In-fact, when there is a recession but high inflation, the capital value might go up, but in real terms the value of the investment has decreased. Yet, you would have to pay tax on that. Is that a fair system?