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

Canadian Tax Journal/Revue fiscale canadienne, Vol. 69, No. 4, 2021, pp. 1231-1250

20 Pages Posted: 16 Feb 2022

See all articles by Arun Advani

Arun Advani

University of Warwick; Institute for Fiscal Studies (IFS)

Date Written: February 15, 2022

Abstract

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.

Keywords: Capital gains, tax rates, tax base, tax policy, equity

Suggested Citation

Advani, Arun, Policy Forum: The Taxation of Capital Gains—Principles, Practice, and Directions for Reform (February 15, 2022). Canadian Tax Journal/Revue fiscale canadienne, Vol. 69, No. 4, 2021, pp. 1231-1250, Available at SSRN: https://ssrn.com/abstract=4025492

Arun Advani (Contact Author)

University of Warwick ( email )

Dept of Economics, University of Warwick
Gibbet Hill Road
Coventry, CV4 7AL
United Kingdom

HOME PAGE: http://https://go.warwick.ac.uk/arunadvani/

Institute for Fiscal Studies (IFS) ( email )

7 Ridgmount Street
London, WC1E 7AE
United Kingdom

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