Fri, Nov 30, 2012 - Page 8 News List

Capital gains tax is misunderstood

By Jason Yeh 葉家興

We have all seen how the US stock market has been one of the better performing stock markets this year despite a capital gains tax being in place there. Anyone who buys stocks in Apple, Google or IBM and makes money on them will have to pay capital gains tax to the US government.

The China Times opinion poll revealed another interesting fact. It found not only that a disproportionate number of respondents who supported the tax were more highly educated, but that around 68 percent of respondents who had purchased stocks were strongly in favor of levying a capital gains tax, compared to 60 percent of support among those who had never purchased stocks. This means that those who own stocks are more in favor of a capital gains tax. Why is this?

Most people know it will be hard to make money from stocks when they first purchase them. The majority of individual investors lose money in the stock market and even those who make money have a hard time making enough to have to pay tax on it.

The actual effect of a capital gains tax is therefore extremely limited.

In addition, investors may not only lack any taxable income from trading in securities, they may actually lose money and then be able to turn around and claim tax deductions on their losses. If someone is really able to make tens of millions of NT dollars in the stock market and be taxed at 15 percent on that revenue by the government, this is nothing compared with the 40 percent an individual might have to pay in tax if they made the same amount from employed income.

There are many financial researchers in Taiwan who use data from the US stock market in their research and publish their findings in international academic journals. If the government encouraged academics to conduct research on investors in the local stock markets, they would discover that if a capital gains tax was adopted, the tax burden of the vast majority of people would be lighter and only the minority of investors who speculate in stocks, and make massive amounts of money doing so, would encounter any problems paying the new tax.

With the benefit of empirical research, the government is capable of standing up to criticism and negative commentary saying that there is a relationship between capital gains tax and stock prices, and with the volume of stock transactions. By employing such research, opposition to the capital gains tax would disappear and praise for it would naturally come.

Capital gains tax is not harmful to the majority of the middle class and is also has benefits for wealth distribution and putting the right kinds of economic incentives in place. There would be far less opposition to a capital gains tax if it were explained clearly and correctly.

Jason Yeh is an associate professor of finance at the Chinese University of Hong Kong.

Translated by Drew Cameron

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