By Mahnaz Abdi

Can CGT increase homebuyers’ purchasing power?

June 23, 2021 - 11:43

TEHRAN- During an open session of the parliament on May 26, the Iranian MPs approved the general outline of capital gains tax (CGT) plan.

As reported, the parliament’s Economic Committee’s report on the mentioned plan was discussed and approved in the session.

The recent shift of liquidity from production to the unproductive markets in Iran has caused high inflation and damage to some industries in the country.

As many experts believe, the imposition of capital gains tax is the only way to exit the liquidity from the unproductive markets and lead it to production.

Based on the approved plan, if a person buys gold, foreign currency, house, or car and then sells it, he/she must pay the related tax.

As defined by the Investopedia, capital gains tax is a levy assessed on the positive difference between the sale price of the asset and its original purchase price. Long-term capital gains tax is a levy on the profits from the sale of assets held for more than a year. Short-term capital gains tax applies to assets held for a year or less, and is taxed as ordinary income.

While CGT prevents the wealth to be owned just by a few people, it leads the liquidity toward production, and help re-distribution of wealth and income in the society.

It was in the middle of the Iranian calendar year 1391 (March 2012-March 2013) that economic officials apparently thought of passing a capital gains tax law.

Finally, this plan was sent to the cabinet by the Ministry of Finance and Economic Affairs in February 2019, after a seven-year delay, and reached the parliament after 10 months.

Capital gains tax is one of the tax bases that, although it can increase public resources, but mainly has a regulatory function and can play an effective role in regulating various markets such as housing, cars, gold and currency by weakening unproductive activities and reducing speculative incentives.

In this regard, the plan on capital gains tax was proposed with the aim of supporting production and investment, reducing fluctuations in asset markets such as car and housing, gold and foreign currency, as well as preventing a sudden rise in prices in these markets.

Now, the question is if CGT can help increase the homebuyers’ purchasing power.

While some opponents of the capital gains tax claim that this tax base benefits from inflation and is therefore inflationary, the truth is that this tax prevents inflation.

There are two claims in opposition to CGT.

First, it is said that this tax causes the seller to collect the CGT amount from the buyer, and as a result, it leads to an increase in prices in the housing market.

Secondly, some say that this tax, which is to be collected from the owners from the place of income and increase in the value of housing, is due to general inflation in the society and increase in the price of all goods, and the owner has no role in creating value added and raising housing prices to pay taxes on that income.

On the other hand, many experts emphasize the anti-inflationary nature of the capital gains tax and believe that people are the beneficiaries of this tax.

According to this group of experts, the losers from this tax base are speculators and unofficial traders who seek to earn astronomical profits by creating fictitious inflation and then creating false added value in non-productive assets, while regulatory taxes, especially capital gains tax, are an obstacle to such profits.

Some experts may believe that this tax base will cause stagnation and decline in transactions, but it is not true that it will affect prices; while the mentioned tax base reduces the turnover of the housing sector as well as reduces the incentive to buy and sell frequently and prevents the increase of prices and inflation of housing.

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