SA’s economic malaise is not due to a shortage of plans, policies or summits; it is due to a chronic shortage of invested capital. Government policy is actively making this worse by punishing the very investors and savers who could help turn the tide.
At the centre of this silent sabotage is capital gains tax (CGT), a tax originally designed to capture windfall profits. However, in its current form CGT is taxing phantom gains, illusions created by inflation and currency depreciation. This is a “hidden” tax on capital of which investors are painfully aware. It is a tax that erodes returns, discourages long-term investment and undermines the foundational principle of tax fairness: that one should be taxed on real income, not accounting fiction.
At present the state is taxing its own failure. Inflation is the consequence of government monetary and fiscal mismanagement. Yet CGT taxes the inflationary component of asset price increases as if it were genuine profit. This means investors are being penalised not for earning a real return, but for enduring the erosion of their investment’s value.
Consider the simple case of an investor buying an asset for R100,000 and selling it 10 years later for R200,000. Superficially, a R100,000 profit has been made. But if inflation averaged just 4.88% a year over that period, 60% in total, the real gain is only R40,000. The other R60,000 is purely inflationary mist. Yet CGT is levied on the full R100,000. That is not taxation; it is wealth confiscation dressed up as fiscal policy.
In fact, under SA’s long-term inflation average of about 8% per annum — that is about 120% over 10 years — that same asset sale would result in a real loss of R20,000. However, this is still taxed as if it were a profit. This is not a fringe technical flaw. It is a systemic distortion that punishes capital formation and deters both local and foreign investors from engaging in long-term wealth creation in our country. They would rather go elsewhere.
Capital is the engine of economic growth. We must stop punishing it. Market economies thrive on capital mobility, private investment and entrepreneurship. All of these require a tax system that respects property rights and rewards long-term thinking. SA’s CGT regime does the opposite.
It imposes an entirely arbitrary 80% inclusion rate for companies and trusts, SA’s major investment vehicles. This makes no allowance for holding periods, inflation or asset classes, and applies this to all nominal gains on a one-size-fits-all basis. The result is not only excessive taxation, but a deeply skewed capital market:
- Investors are pushed towards short-term speculation, not long-term investment.
- Capital is locked into inefficient uses as investors delay asset sales to avoid tax.
- Entrepreneurs face higher hurdles to capital accumulation, undermining small business formation.
In short, CGT as it stands shrinks the private capital pool, undermines investment confidence and increases the cost of capital in an already capital-starved economy.
SA’s gross fixed capital formation is languishing at less than 15% of GDP, far short of the 25%-30% needed to drive economic growth and reverse the ever-increasing unemployment trend. Foreign direct investment, already in the doldrums, continues to underperform relative to our emerging market peers.
Local investors are retreating from risk. Yet tax policy, silently killing growth, continues to act as if real capital gains are being realised, when in fact large elements of gains are frequently merely the result of inflation and currency debasement. This tax regime is in effect penalising patience and rewarding churn, exactly the opposite of what a growth-orientated policy should do.
At the heart of a market economy lies the simple idea that only real returns should be subject to real tax, and that the government should get out of the way of voluntary, wealth-creating activity. This includes ensuring that taxes do not confiscate returns that are illusory and never really made.
Inflation indexing of CGT is a straightforward reform. All that is required is to adjust the base cost of an asset using the consumer price index over its holding period. The SA Revenue Service already tracks purchase dates and base costs. The administrative mechanisms are in place. What is missing is the political will to unshackle capital from inflationary erosion.
Countries that value investment have already acted:
- Israel adjusts asset values for inflation before calculating CGT.
- Chile, Belgium and Switzerland either tax capital gains lightly or exempt long-term gains altogether.
- The US, with a more modest inflation history, has repeatedly debated this reform as a pro-growth, pro-investment measure.
Why is SA, desperate for capital, growth and jobs, still taxing imaginary profits? The country needs to be seen as pro-growth and pro-freedom. Inflation-indexed CGT is not about creating tax loopholes. It’s about ending a built-in disincentive to saving, investing and building.
It is a return to the first principle that tax should be levied only on real economic value, not nominal distortions created by the state’s own failure to manage inflation and maintain currency stability.
A reformed CGT regime would lower the effective tax burden on real returns, unlock capital for productive use, encourage long-term investment, enhance tax fairness and restore investor confidence.
For those concerned about revenue loss, indexing CGT to inflation does not eliminate tax. It merely ensures that the state taxes only real gains. Moreover, the economic growth stimulated by greater investment would likely broaden the tax base, making the reform at least revenue neutral in the medium term.
SA must end the illusion and properly enable long-term investment. It cannot tax its way to prosperity. It must grow, and growth demands capital, investment and confidence, none of which are served by taxing phantom gains.
CGT reform through inflation indexation is not just good policy. It is essential to any credible pro-growth agenda. It sends the clearest possible signal that SA respects private capital, values long-term investment and intends to compete for it.
For every day that we delay, more capital is lost. More businesses stay unfunded. More jobs go uncreated. It is time to scrap the phantom tax and show the world a pro-growth, investor-friendly face.
• Dr Benfield, a retired Wits economics professor, is a senior associate and board member of the Free Market Foundation.
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