Governments use tax to change behavior
Securities are never immune to the interference of central government. There is a saying among financial experts that you can work out the policies of a government by looking at the tax code. Those who participate in the securities market are not immune to this truth.
If the government so wishes, it can completely crush a certain sector of the securities market. The big bosses know this and so they make sure that they do not do anything to jeopardize their relationship with the politicians.
Government taxation can do either of three things. It can go up or go down or remain constant. Depending on your aims in life, you will react differently to each of those scenarios. I will first examine the case of a short term investor who aims to pick up profits though income. They will normally concentrate on the short term speculative securities.
One of the characteristics of this type of investor is that they will buy and sell shares fairly regularly. The reasons for buying and selling are to do with hedging the risks that are involved in their investment.
If they work out that the value of certain securities is about to rise, they will buy them in bulk. When the price rises accordingly, they will sell them to. The difference between the two prices will form the bulk of their profits. This is where the taxation regime comes into play.
The government can easily decide to create a special windfall tax regime to capture the profits that are made in this way. This might be just a revenue raising exercise but could also be a strategy to make sure that people save rather than spend their income.
The positive impact of tax relief
On the other hand consider that investor in securities who chooses those securities which he believes will provide him with the most long term benefits. For instance he may want to create a trust fund to finance the university education of his children. That means that profit will not be a major part of his objectives.
In fact if any such profits arise, he would be looking to invest them into the education of his children. The government might also share his vision to increase the education levels of the population. Therefore they will provide tax relief on any profits that he may make due to the changes in prices of the stocks. They might even go as far as mitigating the alternative losses that he could suffer if the shares go down in value.
As you can see from the discussion above, taxation is a tool through which the central government can regulate investor behavior in the securities market. Some pure capitalists may object to this interference but it has to be accepted that there are also societal dimensions to this intervention. The securities market just has to contend with the intervention and always ensure that it is on the right side of the law. There also has to be recognition that some people will be beneficiaries in this mix.