Policy Forum: The Taxation of Capital Gains—Principles, Practice, and Directions for Reform

The taxation of capital gains is particularly complex given their relatively infrequent receipt, the different ways in which they are generated, and worries about harming productivity. There are theoretical arguments in support of policies ranging from zero rates to high rates of tax on capital. In...

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Bibliographic Details
Published in:Canadian tax journal 2021, Vol.69 (4), p.1231-1250
Main Author: Advani, Arun
Format: Article
Language:English
Subjects:
Capital gains
Income taxes
Inequality
Inflation
International taxation
Principles
Reforms
Small business
Tax base
Tax rates
Tax reform
Taxation
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Summary:The taxation of capital gains is particularly complex given their relatively infrequent receipt, the different ways in which they are generated, and worries about harming productivity. There are theoretical arguments in support of policies ranging from zero rates to high rates of tax on capital. In this article, the author first discusses the impact of capital gains on inequality, which often motivates discussions about how gains should be taxed. He then sets out the principles that determine how gains should be taxed—in particular, how the tax rate should relate to tax rates on labour income. The author proposes that capital gains tax rates should be equalized with income tax rates, subject to provisions to allow gains to be "smoothed" over time and to remove inflation from the tax base. He highlights key transitional issues in moving to such a tax structure. Finally, he discusses specific lessons for Canada.
ISSN:0008-5111
DOI:10.32721/ctj.2021.69.4.pf.advani