The latest conflict over the capital gains tax on stock exchange transactions is not a battle between justice and injustice or big business and the people. It is symptomatic of a much deeper problem in the economic discourse: the gap between the desire for justice and a fuzzy apprehension of the tools needed to realise it.
The idea that the tax symbolised the battle of the rich and powerful against the downtrodden Egyptian public rests on several misconceptions—that the stock market is of no benefit to the national economy, that it is simply a playground for speculators to toy with the fates and savings of ordinary people, and that developing economies like Egypt should do without one. Since it was assumed that the tax was inimical to the interests of wealthy businessmen, its suspension was seen as a victory of the moneyed class over the state. But these assumptions are wrong on several fronts.
Firstly, the stock exchange is not a casino. It is a regulated market that assists firms in increasing capital, expanding operations, and attracting investors. It also helps people invest their savings in ways that benefit the national economy more than investments in real estate, for example. If stock markets were of no utility to the economy and society, they would not exist all over the world, even in countries with socialist or mixed economies. Of course, like any other market, the stock market is subject to manipulation; and it is the state’s duty to combat this and prosecute wrongdoers. But this should not impugn the market as a whole. After all, the state also punishes those who break traffic laws or cause major accidents, but no one suggests we should ban cars.
In addition, not all investors in the stock market are millionaires. In fact, a healthy stock market is one that attracts a broad segment of the community with variable savings and spread risk across different types of financial securities. Investment is monopolised by the wealthy when there is no stock market, because only they have the substantial capital needed to buy into closed companies, purchase valuable real estate, or invest in big commercial ventures. In contrast, ordinary people with small to moderate savings can invest in the stock market. As such, capital gains taxes in most countries are not levied on all transactions, as the Egyptian tax was, but are instead tailored to target major transactions with real capital gains.
Moreover, it should be noted that the stock market did not collapse because of the capital gains tax law. That law was issued last July, and after a slight dip, the exchange returned to its normal level of activity. The market only collapsed with the issuance two weeks ago of the implementing regulations for the tax law, which were long overdue, confused and vague when they finally came. The capital gains tax is less an example of how investors are dissuaded by taxes than how ambiguity and confusion dampen investment in general. The current situation is thus the worst of both worlds: the tax has not been applied, but neither has it been repealed. It has simply "postponed" for two years. And as of this writing, the decree declaring the tax moratorium has still not been published in the Official Gazette, meaning that it has not yet acquired legal force. It is this uncertainty that most damages investment, whether in the stock market or elsewhere.
Given all this, why, then, has the conflict over the capital gains tax been so charged?
I believe it is because since the January revolution, the question of social justice has preoccupied Egyptian society, which now feels a profound sense of social injustice in every area of life—from the distribution of resources to the level of public services, the provision of basic goods, and the level of opportunities for work and social advancement. Social justice was not just an empty slogan, it gave expression to the public anger and frustration with corruption and the elite monopoly of resources, wealth, and opportunity. But at the same time, the lack of clarity and consensus over how to realise social justice, the difficulty of accessing data on social conditions, and the chaotic media treatment of the topic have given certain issues emotional resonance even though they are not a genuine arena of class or social conflict. The capital gains tax became the latest such hot-button issue, even though the revenue it would generate was limited and its impact on social justice near negligible. Instead, it became the object of a symbolic polarisation between one side that seemed to be defending the interests of the rich and another side that claimed to represent the larger public.
These battles over marginal issues will continue to erupt and fade without result as long as there is no deeper discussion of social justice, the causes and sources of poverty and its geographic and class distribution, and how to realize justice without sacrificing economic efficiency. They will continue as long as public and media debates about social justice remain utterly divorced from any talk of the tools, policies, and genuine alternatives needed to foster it.
- Ziad Bahaa-Eldin holds a PhD in financial law from the London School of Economics. He is a former deputy prime minister, former chairman of the Egyptian Financial Supervisory Authority and former chairman of the General Authority for Investments.
This article was published in Arabic in El-Shorouq newspaper on Tuesday 26 May.