In this frank Occasional Paper, Roger Baxter analyses the central tenets of the South African governments decision to implement a capital gains tax in South Africa. He explains why the central tenets are flawed and why CGT is not an appropriate tax for the country. He notes that it is remarkable that a country that is grappling with low levels of Gross Fixed Capital Formation should make the decision to then proceed with a tax that further penalises capital formation.
According to Baxter just when people from an historically disadvantaged back ground enter the mainstream of the economy and start accumulating capital the government introduced CGT which will discourage such capital accumulation! The Austrian school concept of the law of unintended consequences for public policy decisions has this example as a classic case in point. Whilst the government attempts to promote horizontal and vertical tax equity, the unintended result is a significant administrative and cost burden on businesses and ordinary tax payers to the detriment of capital formation, economic growth and employment.
