Wednesday, October 9, 2013

Capital Gains Tax As An Alternative To GST

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.

Technical Notes:

  1. US Federal Capital Gains Tax collection from
  2. Malaysian Sales and Service Tax collection from BNM Monthly Statistical Bulletin


  1. This is where financial literacy is important. Most of the taxations laws were inherited from previous British colonial times. Some still makes sense some dont.
    Many, in fact 99%, have no idea what you are on.
    Some just see it as, hey a loop hole for me to take advantage of.
    Luckily a few can have the time and luxury to rethink about our taxation laws.
    I hope your Capital Gain Tax crusade will gain traction.
    Its not that UMNO leaders or members are stupid not to see. All over the world it need a revolution for some financial changes to take place.
    There is nothing to prevent UMNO from putting the Capital Gain Tax. Nothing. Najib is the Finance Minister.
    It is just nobody thinks about it.
    It is a good suggestion if fairness and equitable wealth ownership is what a political party aspire to.

  2. I'm more interested in the idea that Capital Gains Tax will go some way to addressing income and wealth distribution / inequality. Any research that examines this?

    1. Taxation, Greed, FairnessOctober 22, 2013 at 2:21 PM

      The modern purpose of tax nowadays is to address income and wealth distribution inequality at its core.
      Taxation in the middle ages kingdoms was to collect money for the King. Why? Because the King was powerful and can cause pain for anyone refusing to pay up.
      Then came No Taxation without Representation philosophy by the renegade Europeans in the new Americas against their Kings. And so they got rid of their monarchies and the government of the people by the people for the people become the beneficiary of taxation.
      In France they tax the rich at 75%, in Sweden 60% etc. Its one way of controlling greed by a few as Obama said when he pushed for higher capital gain tax on Wall Streets traders. Their secretaries pay higher taxation then the traders and that is not fair. To achieve fairness, may cause the greedy to invest less. So is that bad or what?
      The higher RPGT will make the greedy think twice before applying for loans to flip properties. So there is less money flowing from the banks to the greedy developers. Is that bad?
      The higher RPgt means the profit from speculating in property is shared. Is that bad? To sum up, all taxations by a democratic government is meant to ensure equality and fairness and help the needful. Of course this means the greedy or the few stronger ones will have to do with less. That is why the majority rules in a democracy.
      If things get too unequal, you then have states where no one is allowed to own property. Now that is very fair and at the same time providing no incentives to be greedy.

    2. Plus we should look into financial transaction tax or the robin hood tax.....Time to tax folks such as Warrior........Hahahahaha

  3. Thanks Warrior, these papers will make suitable bedtime reading

    Yeah couldn't agree more with you on Sandra. I watched Gravity in IMAX3D, the best way to experience the movie. God how does someone look that good at 50. And God, I'm so old...

  4. Hmmm ... I am missing something, Sandra Bullock, ok got to get the dvd. Thanks for the links, Warrior.

    Zuo De