Capital gains tax victimises poor blacks

by Leon Louw and Jim Harris

Mr Manuel's proposed capital gains tax (CGT) has attracted widespread and well-deserved criticism as a discredited high-cost, low-yield tax, inappropriate for a developing country, which deters foreign and local jnvestors and stifles growth. It has been suggested that he may have capitulated to populist 'soak the rich' demands to introduce CGT against his better judgement.

The perverse irony of CGT is that its main victims will be poor blacks rather than rich whites.

Obviously the tax will influence investment decisions of those who already have capital. Certainly it will interfere with markets and put the brakes on healthy change by delaying share and property transactions. Doubtless it will whittle away yearly at the real value of accumulated capital, particularly while inflation continues. But such considerations are of no concern to populists.

Less obviously, but much more destructively, CGT will also directly influence the ability of those without capital to gain and accumulate it. Simply, you get less of what you tax. CGT will unnaturally reduce everyone's accumulation of capital. But it will particularly handicap those who are starting up the economic ladder. It will selectively victimise historically disadvantaged people, who are predominantly black.

Whenever an emerging black businessman manages to grow his business enough to require bigger or better premises or equipment, CGT can grab part of the sale value of his existing capital stock just when he needs every penny of it for the next step. The message will be loud and clear - stay small; do not accumulate capital; do not expand. Whatever apartheid trading regulations did to limit the growth of black entrepreneurs to and in the townships, CGT will subtly achieve all across the land.

CGT will reinforce the existing pattern of capital distribution. To the extent that already-rich whites control more capital resources than emerging black entrepreneurs and businessmen, CGT will perpetuate this imbalance. To the extent that capital has thus far been amassed by a privileged few, CGT will act to prolong this privilege.

This is not just a matter of one more tax causing one more disincentive to enterprise and growth. CGT penalises the very factor of production which has always been in the shortest supply in South Africa - the one factor of production still most sorely needed to accelerate growth and job creation.

Clearly it is government's judgement that falling overall taxation will enable the South African economy as a whole to survive CGT and still prosper. But any developing nation must surely avoid crippling its upwardly-mobile poor, in the interests of fairness if not of growth.

The victimisation of poor blacks and emerging enterprises by CGT cannot have been understood and intended. This regrettable message should be rescinded with all speed. Capital gains tax should be abandoned.