One of the points about Capital Gains Tax that is well put in the video below is that when one earns money after tax, one has a choice. Either one can spend it straight away, or else one can save it to spend later. There is no good reason why the government should prefer you to spend it straight away. On the contrary, deferred consumption - otherwise known as saving - provides capital which promotes long term economic growth.
Capital gains tax is, in this sense, a tax on deferred consumption. It discriminates againts deferred consumption and in favour of current consumption. It is an anti-saving tax.
That is one reason why Hong Kong, for example, with no capital gains tax has a high savings and capital formation rate whereas Britain does not. This discouragement of saving and investment is, in turn, one of the reasons why the growth rate in Britain is so low.
There is one objection that can be made to this line of logic: namely that a proper capital gains tax only attempts to tax 'real' gains - in other words gains that add to the real value of the savings. That is why for many years, the tax was on the gains after allowing for inflation. The trouble with that system is that it is expensive and complicated both to administer (for the government) and to comply with (for the saver). It is thus a big deterrent to investment. Consequently even the Labour government came to prefer a taper, which is a bit easier, and then just a lower rate (simplest of all). This whole history and logic of what does and does not make sense in capital gains tax is being junked in a rushed political accommodation between the Conseratives and the Liberal Democrats.
Thanks to the IEA blog for bringing my attention to this video.
Posted by James Bartholomew • Indexed in Tax and growth
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Mr Bartholomew,
You do not make it clear that liability for tax, on gains in capital, only arises when a taxpayer seeks to realise the gain, by disposing of an asset.
As you do make clear, the UK differs from the system referred to in the Cato Institute video by allowing for inflation.
You do not consider the presence, or absence of capital gains taxation on companies' decisions to reward investors by payment of dividends or by letting the value of the tradable stocks appreciate.
Your argument might be better applied to advocating taxation only on expenditure, not savings. That way, any earnings whether from one's own labour, enterprise or the acquisition, ownership and disposal of property or investments is only taxed when it gets spent. The late Professor James Meade considered this 30 years ago.
Posted by: Will at May 23, 2010 07:49 PM
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Is it therefore reasonable to assume, that Obama, not normally known as an idiot, is cynically playing short-term tactics, by increasing CG's tax to acquire an immediate increase in revenue, simply because either he doesnt expect, or want to be in the Whitehouse for more than one term? Most sensible viewers of your video clip would be wondering why intelligent, (albeit left wingers) would want to choke an already pressured economy, unless they were really only interested in short-term gains?
Posted by: Barry Stevens at May 23, 2010 02:39 PM