Hi, Your first example feels contrived. The company has left imputation credits unused when it is sold. Any seller in this situation would pay themselves a dividend to use the imputation credits, and then sell the company for a lower amount, so avoiding double taxation.
Thanks Craig, fair point, and it results from my simplifying assumption that person A owns the whole company. If instead person A buys only 10% of the shares in the company, for $1m, and sells them one year later for $1,070,000 (10% of the company value then of $10.7m), their capital gain would then be $70,000, on which cgt would be paid by A. Double taxation then arises on their 10% share of the pre-tax profits of the company, and they can't avoid this by paying themselves a dividend because they only own 10% of the shares. They might seek to persuade their fellow shareholders to persuade management to pay out all of the after-tax profits as a dividend, but may not succeed. Corporate NZ is full of companies that retain some of their profits, Martin
In all countries, the real underlying reason for CGT is class wars. CGT serves to keep the working class in the working class. Without CGT, it is considerably easier for a working class member to ascend to the upper class (the non-working class) if he/she is smart enough to recognize how the system operates.
CGT serves as an obstacle to prevent this upwards mobility from occurring. In other words, CGT is inherently corrupt.
Joyce, that is an interesting hypothesis to explain the popularity of capital gains taxes, but there are several other hypotheses that explain the same observation, such as envy and a desire to raise more tax revenue. Perhaps there are certain other facts about capital gains taxes that your hypothesis can explain whilst alternative hypotheses cannot. If so, it would be interesting to hear of them, Martin
The same could be said of progressive income taxes; that they are an outcome of envy. Truth is, the main reason for a CGT is it levels the playing field between taxing labour and capital income. That could be a fairness/equity/envy argument, but it could also be an efficiency argument since otherwise, as in NZ, everybody starts investing in property and flipping houses. The Norwegians recognise two sources of income tax - labour and capital - and tax them separately and differently. The IRD has put up this idea in their latest report.
Peter, as indicated in my post and the more detailed paper referred to in footnote 3 of the post, the absence of CGT on property does not provide any incentive for "everybody to start investing in property and flipping houses". The absence of CGT would have driven up property values a long time ago. Current buyers would not then gain any benefit from buying an asset whose price already impounds this desirable feature. Likewise, there is no benefit to be gained from buying shares in a company whose products are and have been very popular for some time, because that favourable feature of the company would already be impounded into the price of its shares. This is the semi-strong version of the Efficient Markets Hypothesis, for which there is immense empirical support.
You’re arguments Martin are correct as to equity (fairness). There is a complication in that a CGT levied only on sale can be deferred, lowering the effective tax rate. But it doesn’t alter your conclusions.
Thanks Paul. I agree and make similar comments in footnote 8. Deferral of the tax payment can be expressed as an annual payment with a lower cgt rate. To determine this lower rate, one uses the maths in Appendix 1 of the SSRN paper referenced in footnote 3 of the post, but with the explicit deferral of payment, to determine the PV of the cg taxes. One then solves for the effective cgt rate coupled with annual payment that produces the same PV for the cg taxes, Martin
The really unfair thing about taxing capital gains is that the family home would be excluded. Unlike the business assets you describe, the imputed rental income of owner-occupied homes is not taxed. That is the largest hole in our income tax & the greatest source of wealth accretion of most NZers and, therefore, of wealth disparities over time. Yet that would be further exaggerated by exempting homes from the proposed CGT.
Whatever tax regime government chooses to apply to an asset, it is publicly available information, and therefore will be impounded into the price that people pay for that asset. This is the semi-strong version of the Efficient Markets Hypothesis, for which there is very strong empirical support. If capital gains and/or imputed rent on an asset are not taxed, this constitutes favourable tax treatment but the buyer of such an asset pays more for it to reflect that favourable tax treatment, and this higher purchase price eliminates the benefit to them from the favourable tax treatment. Thus, there is no source of wealth accretion or unfairness in not taxing capital gains and/or imputed rent. Similarly, if company X produces a product that is very popular, the person buying shares in that company will not benefit, because the price they pay for the shares will be higher to reflect the success of the company. The only asset owners who benefit or lose are those holding the asset at the time new information arrives, such as the announcement of a new tax on the asset or the announcement that sales of the company's products are even higher (or lower) than previously expected.
Can you cite a country that does not exempt the family home? So, we have a classic argument that makes the perfect the enemy of the possible: tax the family home and say goodbye to any role in government; exempt the family home and you have a chance. Of course, one could introduce limits on the exemption (such as an extreme value in order to limit use of the family home as a way of avoiding capital gains tax).
The market value of a home is the present value of the future services it provides its owner, proxied by its imputed rental stream. If we choose not to tax the imputed rental why tax the gain or loss in its present value?
Sure, few countries tax family homes because it’s unpopular but that doesn’t mean it’s unfair. On the contrary.
And note that local authority rates are a perfectly workable tax on property including family homes, ie on their imputed rental value, reflected in their market value.
Hi, Your first example feels contrived. The company has left imputation credits unused when it is sold. Any seller in this situation would pay themselves a dividend to use the imputation credits, and then sell the company for a lower amount, so avoiding double taxation.
Thanks Craig, fair point, and it results from my simplifying assumption that person A owns the whole company. If instead person A buys only 10% of the shares in the company, for $1m, and sells them one year later for $1,070,000 (10% of the company value then of $10.7m), their capital gain would then be $70,000, on which cgt would be paid by A. Double taxation then arises on their 10% share of the pre-tax profits of the company, and they can't avoid this by paying themselves a dividend because they only own 10% of the shares. They might seek to persuade their fellow shareholders to persuade management to pay out all of the after-tax profits as a dividend, but may not succeed. Corporate NZ is full of companies that retain some of their profits, Martin
In all countries, the real underlying reason for CGT is class wars. CGT serves to keep the working class in the working class. Without CGT, it is considerably easier for a working class member to ascend to the upper class (the non-working class) if he/she is smart enough to recognize how the system operates.
CGT serves as an obstacle to prevent this upwards mobility from occurring. In other words, CGT is inherently corrupt.
Joyce, that is an interesting hypothesis to explain the popularity of capital gains taxes, but there are several other hypotheses that explain the same observation, such as envy and a desire to raise more tax revenue. Perhaps there are certain other facts about capital gains taxes that your hypothesis can explain whilst alternative hypotheses cannot. If so, it would be interesting to hear of them, Martin
The same could be said of progressive income taxes; that they are an outcome of envy. Truth is, the main reason for a CGT is it levels the playing field between taxing labour and capital income. That could be a fairness/equity/envy argument, but it could also be an efficiency argument since otherwise, as in NZ, everybody starts investing in property and flipping houses. The Norwegians recognise two sources of income tax - labour and capital - and tax them separately and differently. The IRD has put up this idea in their latest report.
Peter, as indicated in my post and the more detailed paper referred to in footnote 3 of the post, the absence of CGT on property does not provide any incentive for "everybody to start investing in property and flipping houses". The absence of CGT would have driven up property values a long time ago. Current buyers would not then gain any benefit from buying an asset whose price already impounds this desirable feature. Likewise, there is no benefit to be gained from buying shares in a company whose products are and have been very popular for some time, because that favourable feature of the company would already be impounded into the price of its shares. This is the semi-strong version of the Efficient Markets Hypothesis, for which there is immense empirical support.
I feel unmotivated to explain in public the procedure for ascending into the upper class with the help of the absence of a CGT.
You’re arguments Martin are correct as to equity (fairness). There is a complication in that a CGT levied only on sale can be deferred, lowering the effective tax rate. But it doesn’t alter your conclusions.
Thanks Paul. I agree and make similar comments in footnote 8. Deferral of the tax payment can be expressed as an annual payment with a lower cgt rate. To determine this lower rate, one uses the maths in Appendix 1 of the SSRN paper referenced in footnote 3 of the post, but with the explicit deferral of payment, to determine the PV of the cg taxes. One then solves for the effective cgt rate coupled with annual payment that produces the same PV for the cg taxes, Martin
The really unfair thing about taxing capital gains is that the family home would be excluded. Unlike the business assets you describe, the imputed rental income of owner-occupied homes is not taxed. That is the largest hole in our income tax & the greatest source of wealth accretion of most NZers and, therefore, of wealth disparities over time. Yet that would be further exaggerated by exempting homes from the proposed CGT.
Whatever tax regime government chooses to apply to an asset, it is publicly available information, and therefore will be impounded into the price that people pay for that asset. This is the semi-strong version of the Efficient Markets Hypothesis, for which there is very strong empirical support. If capital gains and/or imputed rent on an asset are not taxed, this constitutes favourable tax treatment but the buyer of such an asset pays more for it to reflect that favourable tax treatment, and this higher purchase price eliminates the benefit to them from the favourable tax treatment. Thus, there is no source of wealth accretion or unfairness in not taxing capital gains and/or imputed rent. Similarly, if company X produces a product that is very popular, the person buying shares in that company will not benefit, because the price they pay for the shares will be higher to reflect the success of the company. The only asset owners who benefit or lose are those holding the asset at the time new information arrives, such as the announcement of a new tax on the asset or the announcement that sales of the company's products are even higher (or lower) than previously expected.
True that
Can you cite a country that does not exempt the family home? So, we have a classic argument that makes the perfect the enemy of the possible: tax the family home and say goodbye to any role in government; exempt the family home and you have a chance. Of course, one could introduce limits on the exemption (such as an extreme value in order to limit use of the family home as a way of avoiding capital gains tax).
The market value of a home is the present value of the future services it provides its owner, proxied by its imputed rental stream. If we choose not to tax the imputed rental why tax the gain or loss in its present value?
Sure, few countries tax family homes because it’s unpopular but that doesn’t mean it’s unfair. On the contrary.
And note that local authority rates are a perfectly workable tax on property including family homes, ie on their imputed rental value, reflected in their market value.