|
One of the most
unfair features of the capital gains tax is that it taxes gains that may
be attributable only to price changes, not real gains. Different
analysts give different views regarding Capital Gains Tax Cut. Let us
analyse both step wise.
Arguments for the motion:
1. A cut would increase investment, output, and real wages. If the tax
on the return from capital investments--such as stock purchases, new
business start-ups, and new plant and equipment for existing firms--is
reduced, more of those types of investments will be made. Those
risk-taking activities and investments are the key to generating
productivity improvements, real capital formation, increased national
output, and higher living standards.
2. A cut would liberate locked-up capital for new investment. For those
already holding investment capital, a capital gains tax reduction might
create an "unlocking effect": individuals would sell assets
that have accumulated in value and shift their portfolio holdings to
assets with higher long-run earning potential. The unlocking effect
might have strong positive economic benefits as well: the tax cut would
prompt investors to shift their funds to activities and assets--such as
new firms in the rapid-growth, high-technology industry--offering the
highest rate of return.
3. A cut would produce more tax revenue for the government. If a
capital gains tax cut increases economic growth and spurs an unlocking
of unrealized capital gains, then a lower capital gains rate will
actually increase tax collections.
4. A cut would eliminate the unfairness of taxing capital gains due to
inflation. A large share of the capital gains that are taxed is not real
gains but inflationary gains. The government should not tax inflation.
Arguments against the motion:
1. Provide a large tax cut for the wealthiest citizens.
2. Have very little positive impact on the economy. Many argue that
taxes do not influence investment decisions and that even if there were
an unlocking effect.
3. Increase the budget deficit. If a capital gains tax cut reduces
revenues and increases the budget deficit, then savings and investment
might actually fall after the tax cut. That would only worsen reported
capital shortage. |
