COSATU Submission on Capital Gains Tax Presented to the Portfolio Committee on Finance, 23 January 2001

Introduction

Advantages of Capital Gains Taxation

Increased overall progressivity of the taxation system.


Limiting tax avoidance and evasion and distortion of the tax structure.


Raising of additional revenue.


Discouraging destabilising speculative investment

Conclusion

Introduction

This constitutes COSATU’s submission on the issue of taxation of capital gains, as proposed in the Taxation Laws Amendment Bill 2001. COSATU strongly supports the proposed introduction of capital gains tax. We have called for this over a long period of time, and its announcement was one of the aspects of the 2000/2001 Budget that was welcomed by COSATU. A letter of support from COSATU was also sent to SARS on 7 June 2000 in relation to earlier versions of the legislation.

We have not scrutinised the technical detail of the Bill, and as such our submission focuses on the key broad issues of debate. The following section addresses what COSATU believes to be the major advantages of the introduction of capital gains tax.

Advantages of Capital Gains Taxation

Increased overall progressivity of the taxation system.

Given South Africa’s extreme levels of inequality, South Africa’s tax system needs to be far more progressive overall. The poor currently bear a disproportionate burden of VAT, and while the income tax system is moderately progressive, the wealthy are better placed to minimise their tax payments. Data recently released by Statistics South Africa (1) (albeit very dated) indicates that Africans on average pay a higher percentage of their income in both indirect and direct tax than for any other racial group, with whites paying the lowest percentage of their income in each case. Particularly in the case of indirect taxes, the lowest quintile of Africans (the bottom fifth of Africans by income level) pay a higher proportion of their income in indirect taxes than any other quintile of Africans or other race group, close to double the proportion paid by either the poorest or wealthiest whites. While the situation may have changed slightly since SSA’s data collection, our tax structure has not changed much over the past few years. These figures, in the context of our extreme inequality, make a strong case for the complete overhaul of our tax system. The introduction of capital gains tax would be one element of this (further proposals have been tabled before this committee in the past).

The wealthy, by definition, have capital at their disposal while the working class depends on labour power for earning income. It is unjustifiable and prejudicial to workers that a Rand of income earned through capital should be taxed any less than a Rand earned through human labour. Income earned through capital gains confers the same economic power and potential consumption as through other sources, and there is no reason why this particular form of income – disproportionately earned by the wealthy – should be exempt. While the introduction of capital gains tax would go some way towards mitigating this inequitable treatment, even at the rates of capital gains tax proposed there will still be preferential treatment of income earned through capital gains and hence a bias towards the wealthy.

Limiting tax avoidance and evasion and distortion of the tax structure.

Related to the above motivation, the absence of a capital gains tax creates a perverse incentive for taxpayers, specifically the wealthy, to convert income into capital gains in order to reduce their tax payments. The resultant distortions make the overall tax system less efficient, and encourage firms and individuals to spend resources on tax consultants to minimise their taxes rather than such resources being available for productive public use.

The introduction of capital gains tax will also improve the perceived fairness of the tax system, which is important for taxpayer morale especially of wage and salary earners.

Raising of additional revenue.

The introduction of a new tax and the limiting of opportunities for avoidance and evasion will obviously raise additional revenue for the government. Reducing the distortions in the tax system will have wider positive effects in broadening the tax base. Such resources are sorely needed for investment in social and economic infrastructure and the meeting of service backlogs. A higher rate of capital gains tax would naturally further increase its revenue-raising potential. COSATU hopes that consideration will be given to increasing the rate of capital gains tax, given that the proposed rate is certainly not high by international standards.

It can also be noted that indexing capital gains to inflation would reduce the revenue to be raised as well as increasing administrative and collection costs. According to the Economic Policy Research Institute, the vast majority of countries that tax capital gains do so without indexation, and there has actually been a shift away from indexation internationally.

Discouraging destabilising speculative investment

The type of "investment" which could potentially be discouraged by the introduction of a capital gains tax is speculative investment. Capital gains tax would make the frequent and unproductive changing of hands of such assets more expensive. This "investment" does little to boost production and create jobs, but rather creates volatility and financial instability. The possibility of such an effect is a further motivation for capital gains tax, not a demotivation as some interested parties would contend. Capital gains tax can actually promote national savings, by "locking" taxpayers in to investments and increasing the costs of realising consumption from appreciated assets. Removing the current preferential treatment of capital gains could actually promote the real productive investment which South Africa needs.

Conclusion

COSATU regards the criticisms of the proposed tax and suggested delays in its implementation, which are being raised from various quarters, as being devoid of valid grounds. Opposition to additional taxation is to be expected from the parties directly affected, on grounds of narrow self-interest. Furthermore, ample time has already been allowed for companies to prepare themselves since the announcement of the proposed introduction almost a year ago.

COSATU thus encourages the Committee to ensure that the legislation meets the intended objectives and limits the scope for exemptions, and to make certain that there are no loopholes for tax avoidance or evasion. It will also be important that sufficient resources are devoted to the implementation of the legislation to maximise compliance.

Footnotes

1. Statistics South Africa (2000) Measuring Poverty in South Africa, Pretoria.

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