ECONOMY

Capital gains tax talk

Not so long ago, specifically in early September 1999, at the peak of the Athens Stock Exchange’s powerful rally, many Greek equity analysts were saying they were about to tear up their diplomas in a show of exasperation over the investment public’s indifference to their valuation-dominated recommendations. Two years later, the same analysts have taken their revenge; but it is not sweet. Investors may pay more attention to company or market valuations nowadays but traders, seeking a quick profit, continue to outnumber them by far. Could the imposition of a tax on capital gains from stock transactions be the right answer to the lack of a long-term stock investing culture in Greece? Under certain conditions, it could. It is now being leaked to the press that the government is contemplating the introduction of a capital gains tax. The proposal is not new and has been discussed for awhile in various circles, but the sorry state of the Athens Stock Exchange in the last couple of years has discouraged officials from bringing it out into the open. It looks as if other priorities, possibly linked to the current administration’s search for gestures designed to improve its social image at a time it is forced to undertake painful measures to tackle the country’s social security problem, have taken priority. Nevertheless, the benefits of a capital gains tax should outweigh any costs, provided the government sends the right message to everyone. Namely, that the capital gains tax is not intended to punish the hundreds of thousands of households who trusted the government’s projections of a rosy economic future and put their money, either directly or indirectly through mutual funds, into the Athens bourse or discourage those who seek alternative investment opportunities at a period of low interest rates. Rather, it is a tax that cuts into the quick profits of speculators or others who often take advantage of inside information. Everybody knows Greece will have to harmonize the taxation of income from equities with the norms found in other EMU countries. This does not mean it will have to duplicate them. Its economy and markets have their own unique characteristics and require pertinent measures. For example, Greece cannot afford to impose both a capital gains tax and at the same time keep in place its current 0.3 percent transaction tax on stock sales. Instead, the introduction of a capital gains tax should be accompanied by the elimination of the current transactions tax. If the government mistakenly proceeds with both, it will learn a bitter lesson. Its tax revenues will not grow as initially thought and the business climate will deteriorate, leading to less investment and consumer spending, therefore hurting economic growth and employment. Although it is too early for anybody to speculate on the final form this capital gains tax will take, it is likely that the government will adopt the system of withholding tax rates instead of personal income tax rates. In the second case, individuals would be obliged to include capital gains in their annual income statement and be taxed according to their personal income’s marginal tax rate, which in general should have been more painful. Under the regime of withholding tax rates, different effective tax rates should apply to different stock holding periods. So, it is normal to expect a higher effective tax rate when the holding period is relatively short, such as under six months, and a lower tax rate for longer periods. It should be stressed that it will be smart for the authorities to award long-term investors by removing the tax altogether for those who held on to the stock for, let’s say, two years or more. It will show the government’s primary concern is not to fill the state coffers with more tax revenues, as some critics will charge, but rather to do so in a way that promotes investment, business innovation and enhances Greece’s long-term economic growth. But the capital gains tax should be fair as well. So, individuals incurring losses from selling stocks should be allowed to write them off within a reasonable period of time, and the treatment of individual and institutional investors should be equal. That is, the same withholding tax rates should apply to any realized capital gain on stocks regardless of the identity of the person who initiated and completed the transaction. The capital gains tax, like any tax, is not a panacea. And it hardly foreshadows a doomsday scenario as some may charge. Although the Athens bourse continues to sail through rough waters, the introduction of a capital gains tax in 2002 or 2003 will not sink it. On the contrary, it provides an opportunity for the government to shore up its social image while promoting the benefits of long-term stock investments as a vehicle for economic growth for a local investment public known to be fond of short-term stock capital gains. The problem is more serious in Athens which is home to more than half of private cars in Greece. The 1,700,000 cars on the roads of the capital have an average age of 11.6. Of these, 42 percent (726,000) are of conventional technology and 310,000 of them are older than 20 years. The cars older than 15 years, which represent 31 percent of the total, account for 52 percent of carbon monoxide emissions and for 40 percent of nitrogen oxides.