Capital Gains Tax, which had been debated for a long time, has been finally approved by the parliament.
CGT is a component of income tax, levied on income from the transfer of movable or immovable capital assets, tangible or intangible. The purpose of this tax is to regulate the activities of various economic sectors, limit speculative practices, increase government revenues, promote social justice and reduce income gap.
Some radical supporters of this type of tax speak of its likely effect on bringing down inflation, stabilizing the foreign currency market, increasing investment and economic growth.
Amirmohammad Galvani, an economic expert prefaced the editorial for the Persian daily Donya-e-Eqtesad’s Tuesday edition with this note. A translation of the text follows:
With the country going through its fourth currency crisis and multiple increases in the prices of assets compared with the beginning of the 2010s, which saw the onset of sanctions, perhaps the introduction of CGT is not unexpected, i.e., when assets such as gold coins, cars and housing see price growth manifold higher than inflation and even more than the exchange rates.
Before looking into the plan approved by the parliament, it is necessary to clarify the times when governments are allowed to levy taxes and the preconditions for legitimizing taxing.
Most economists consider tax an effective policy tool for creating efficiency, reducing income and wealth inequality, directing the allocation of resources by paying subsidies to sectors that have positive effects on the economy and taxing unproductive sectors.
Political pundits see the ability to collect legitimate taxes and being accountable for them as one of the features of a modern and capable government. This is while economists believe the increase in efficiency, justice and acceptability of the government and the provision of services in return for taxes are important prerequisites for taxation.
Raging Inflation
There is extensive literature about the perception of inflation as the most ineffective and illegal type of taxation, especially by Austrian economists and market economy believers.
A chronic inflation has been raging for five years in its most unprecedented way in Iran. The economy has been ensnared in investment, rather than engaging in productive activities. On the other hand, given social and political conditions, the relationship between the state and the nation has weakened and so it is much more difficult to impose any new type of tax, especially CGT.
The parliament proposal named “tax on speculative practices” envisions that the income gained from the price difference of real-estate, cars, currency, precious metals and cryptocurrencies must be taxed.
Several key points should be highlighted here:
With the attribution of the nominal income from the increase in asset prices to “income”, the policymaker considers any kind of nominal return as illegal and is trying to collect tax from it. This comes as the increase in demand for investment and speculation in assets is the result of inflation and a rational response to inflation, given the constant decrease in the real value of savings. In fact, the government, which is naturally responsible for controlling inflation, for some reason has not tried to reduce it and may have compounded it with its misguided policies. And now it is imposing taxes on any type of inflation shield.
Income tax should be basically levied on the returns in excess of inflation. Note that in inflationary conditions, most people are not able to get returns from the markets and their real income is negative.
Speculation is synonymous with frequent transactions in the market with the intention of making profit, but according to this new law, even people who have bought and sold property only once are required to pay a percentage of the difference in the purchase and sale price — from 60% for sales within one year to 10% for the fourth year and more — as tax.
The minimum expectation is that exemptions should also be included for real-estate like those included for cars and gold (four cars for each household, $2,400 worth of foreign currency and 200 grams of gold are exempt from income tax).
One symptom of hot money in Iran’s economy is the increase in the share of money in liquidity to 25.3% in the month ending Feb. 19, 2023, and capital outflows. In fact, CGT on nominal returns can lead to more capital outflows from the country.
Obviously, when the attractiveness of productive activities is low and the business environment is facing many problems, the imposition of taxes without introducing reforms in other sectors will not lead to a growth of capital formation.
This type of tax, at a time when there is no positive perspective of inflationary and macroeconomic conditions, can lead to a lock-in and decline in the supply of assets to the market. As a result, there will be an incentive to keep the asset for a long time to avoid tax.
