There is currently a fierce debate raging in Egypt around the imposition of a capital gains tax (CGT) on the stock market, which has also witnessed waves of selling that have driven share prices down significantly in an attempt to pressure the state into cancelling the tax, which is applied in developed free market economies and the majority of developing countries, and which the International Monetary Fund (IMF) itself — the backer and champion of capitalism — supported as part of the economic reform package necessary in Egypt.
Previously, successive governments would take from the IMF’s suggestions what would harm the poor and reject measures that would affect the wealthy and large capital, in an embodiment of the stark social bias towards the latter's interests at the expense of society at large.
Another controversy, which preceded the current one, was about the increase in the income tax rate on earners of over LE1 million a year from 25 to 30 percent.
One side of this debate is motivated by pure personal interest, regardless of the public interest, while the other part is moved by the urgency of reforming the tax system, to turn into a tool for financing the public treasury and realising social justice.
What is interesting is that media personalities in the private television channels have styled themselves as “experts” on the tax issue and have attacked the tax reforms.
This was not done in defence of merely the interests of the owners of the channels, but of their own personal interests, as they belong to the tax bracket whose income exceeds LE1 million annually. Many of them are shareholders in the lack of professionalism governing the media sector.
In order to build a fair position on this issue one must examine the tax reforms, applicable models worldwide, as well the tax law as a whole, with its strengths and the weaknesses that need to be addressed as Egypt builds its new system.
Do not bow to blackmail
Firstly, it is important to clarify that the extortionary drop in the stock market should not shake decision makers, because all the shares listed in the stock market belong to companies that are still up and running and that is the most important thing for the economy and decision makers. As for rises and falls in stock prices, it is ultimately the result of trading operations, and could be based on real changes in the performance of listed companies, morale factors, fears related to financial and monetary policies, or changes in the global financial climate.
But as long as the enterprise whose shares are being traded is up and running, actions in the market have no real effect on the real economy that concerns the state and its people.
Direct and indirect taxation is the main source of revenues for the state, and therefore the primary financier for public expenditure on health, education, defence, security and infrastructure, including roads, telecommunications, water and sanitation plants, power stations and subsidies of commodities, subsidies to exporters, welfare programmes for the poor to achieve social peace, and other forms of public spending.
The more tax brackets and gradual taxation based on income, and the more direct taxation, the fairer the tax system. Many of the advanced free market and developing countries function with this principle, whether for the sake of social justice or revenue generation, or both.
In Egypt, the tax system remained unchanged through both the 25 January 2011 and 30 June 2013 revolutions, as a principal symbol of the enduring policies of deposed president Mubarak. And it is a symbol of injustice and social bias against the poor and the middle class, and towards the wealthy, and parasitic activities and parasitic foreign capitalism, at the expense of the nation.
The endurance of this tax system, with all its imbalances, was questioned by all those who revolted against the social injustice enshrined by the system under the Mubarak regime in 2005.
One of the unfair features of this system was the setting of fixed exemption limits in 2005 without taking into account the rise in prices, and which eroded the purchasing power of taxpayers and burdened the poor with tax in the years since then.
The widening of tax brackets also meant that people in completely different income brackets paid taxes at the same rate.
The highest bracket, which now includes those earning over LE1 million annually and that are taxed at a rate of 30 percent, remains much lower than the global average and the rates in effect in developed and developing capitalist countries which attract investment.
Moreover, companies are all taxed at a rate of 25 percent, regardless of their size or profits, which is unfair to the owners of small and medium enterprises.
Equally unfair is the absence of a tax on capital gains, or the exploitation of finite resources such as oil and gas, gold, cement, sand, phosphate, iron, talc and other raw materials.
In the face of such imbalances, everything that happened after 25 January 2011 regarding the tax law were stopgap measures, while the latest amendments are the first real attempt to depart from the corrupt and unjust Mubarak system.
In 2005, the Mubarak regime had established a tax system exempting those earning LE9,000 a year or less, and taxed those earning up to LE20,000 at a rate of 10 percent, and those earning up to LE40,000 at a rate of 15 percent, and those earning any income above LE40,000 a year at the same rate of 20 percent, lumping the middle and upper classes together.
This law also taxed both private and public companies’ earnings at an equal rate of 20 percent, instead of the law before 2005 that taxed private companies at a maximum rate of 32 percent and public companies at a maximum rate of 42 percent.
This system did not have enough tax brackets and gradualness of taxation but favoured parasitic capitalists (whose incomes are not tied to their labour) exempted from tax, for example in the stock market.
This put the onus of reform on succeeding governments to put in place a new system of more gradual taxation with more tax brackets, similar that to existing in developing and advanced free market economies.
The philosophy of gradual taxation is based on the fact that the rich benefit more from all forms of public spending. Thus, they are supposed to contribute more to financing it.
Dr Samir Radwan had proposed, during his mandate as minister of finance, a capital gains tax of 10 percent on the stock market, but the government refused.
He also proposed raising the tax exemption limit from LE9,000 to LE12,000 in 2011, which was only implemented in 2013, by which time it had become necessary to raise that limit further to LE18,000, for it to meet the real value of the exemption limit set in 2005.
There was no substantial change to the tax law until the current cabinet, which began departing from policies inherited from Mubarak. And because Egypt is part of the larger global economic framework, it is important to be aware of the realities of this environment, and assess our latest reforms in light of them.
Models of capital gains tax in developing and developed capitalist countries
Before going into detail about income tax and corporate tax in developing and developed capitalist countries, it is important to point out that almost all developed capitalist countries and the majority of developing countries impose a capital gains tax on stock markets at rates higher than the one decided in Egypt.
This means that those who cite the world in their attack on its implementation in Egypt are acting from selfishness and want to continue to profit at the expense of society, choosing what suits them in capitalism while rejecting measures within it that restore a semblance of justice, such as the CGT.
And in the face of the loud voices and the owners of private television channels, taxes are deducted from the workers and professionals before they even collect their wages. The latter also pay, along with the farmers, indirect taxes on goods and services, and pay stamp taxes in silence for the benefit of the nation.
Worldwide figures indicate that taxes on capital gains reached 50.8 percent in the United States, 59.8 percent in Italy, 56.5 percent in Denmark, 54.9 percent in France, and 46.7 percent in the United Kingdom.
The capital gains tax rate has reached 43.9 percent in Brazil, 33.2 percent in India, 25 percent in China, and 39.2 percent in the Zionist entity.
Therefore, raising the spectre of the flight of foreign investors in rejecting the tax is fabrication on the part of media personalities and vested interests. And in the light of double taxation treaties between Egypt and other countries, it is less costly for a lot of foreign investors in Egypt to pay the 10 percent tax in Egypt than the much higher tax in their home country. The tax targets Egyptian stock speculators who want to avoid giving the state its due.
The government has been fair to investors in the stock market that it allows them to pay taxes on their profits only, by allowing them to deduct their losses from the next year’s profits and then taxing the net profit, over a grace period of three years, except if the investor is faced with a net loss over the period, in which case they are exempted from tax.
Income on the wealthy: Egypt has one of the lowest rates in the world
As for income and corporate tax, figures from a World Bank report on growth indicators in the world shows that the tax rate on the highest income bracket is 35 percent on earners of over $373,000 a year in the US on the federal level, and eight percent on the state level, so 43 percent in total. Corporate tax is 40 percent in the US, which is a stronghold of capitalism.
In Japan, the income tax rate on those earning over $182,100 a year is 50 percent, and corporations are taxed at a rate of 41 percent.
In Germany, those whose income exceeds $334,500 a year pay 45 percent tax, and companies 29 percent.
In France the rate is 40 percent for individuals earning over $92,900 a year and 33 percent corporate tax. In the UK it is 40 percent on incomes over $66,100 and 28 percent on corporations.
Denmark taxes those earning more than $62,300 a year at a rate of 62 percent, and corporations at a rate of 25 percent. In Sweden, the income tax is 57 percent for incomes exceeding $66,400 a year, and the corporate tax is 26 percent.
And in China, which has one of the fastest growing economies and is among the top three nations to attract foreign direct investment, the income tax rate is 45 percent on those earning over $175,500 a year, and the corporate tax rate is 25 percent.
In Thailand, earners of over $113,200 are taxed at a rate of 37 percent and companies at 30 percent. In Turkey, incomes of over $28,600 a year are taxed at 35 percent and companies at 20 percent. In South Africa, individuals earning over $63,300 a year are taxed at 40 percent and companies are taxed at 35 percent.
It is clear that the burden of taxation borne by the highest income bracket in Egypt is much lighter than the ones in other developing and developed countries, and the same goes for corporations.
The current law also exempts all capital savings and bonds, to encourage savings, which constitute 7.2 percent of Gross Domestic Product, according to the Central Bank of Egypt.
Egypt is ranked the lowest in the world in terms of savings, with the worldwide savings rate at 21 percent, and the rate of low-to-medium income countries at 30 percent, East-Asian and Pacific countries 47 percent, and China 52 percent.
But since this exemption is not effective in raising the rate of saving in Egypt, retaining it is a waste of tax revenues due to the state from interests on deposits, which should be included in the CGT, which means that if the interest on deposits in 10 percent, the state would take one percent.
An important step … but holistic reform required
The CGT is a first and important step in the reform of the tax system, which also needs to exempt those earning less than LE18,000 a year from the income tax, and needs to exempt micro, small and medium enterprises and cooperatives from taxes and customs until they grow into large taxable enterprises.
The tax system needs to be gradual for both individuals and corporations and the law needs to clearly outline a simple way to collect taxes and dictate penalties for tax evaders similar to those imposed in other developing and developed capitalist countries.
If those with interests in the stock market want to intimidate the cabinet into going back on its decision, as happened under Essam Sharaf’s cabinet in 2011, then the cabinet — supported by the people — needs to stand fast in the face of such extortion.