I’d really like to see a capital gains tax (CGT) in Malaysia. But as much as I support such a tax, CGT is simply not a good alternative for GST.
Here’s why (USD millions):
It’s simply not a very stable source of revenue (log annual changes):
The standard deviation is 27.2%, which means that in any given year, you could see CGT collection going up or down more than 50% (min-max difference is 144%). The distribution of growth in collections is also highly skewed.
Malaysia’s SST is a lot more stable (RM millions and log annual changes):
The standard deviation is a full third less (min-max 101%), and would be even lower if I had ignored the very early years of SST (1972-75). The distribution of revenue collection is almost normally distributed.
Why the difference?
CGT is dependent on investment, and SST/GST is dependent on consumption. Investment, both direct and in financial securities, is highly sensitive to the business cycle, while consumption tends to be much less so.
There are some advantages for having a pro-cyclical tax such as CGT, as the government collects more revenue during booms and collects substantially less during busts, i.e. it acts almost like an automatic stabiliser. But it’s not exactly ideal for fiscal planning or consolidation.
I like CGT mainly for its impact in mitigating income and wealth inequality. For raising government revenue, not so much.