Economics Dictionary of ArgumentsHome
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| Capital Gains Tax: Capital Gains Tax (CGT) is a tax on the profit from selling assets like stocks, real estate, or businesses. It applies to the difference between the purchase and selling price. Rates vary by country, asset type, and holding period. Some governments offer exemptions or lower rates for long-term investments to encourage economic growth. See also Taxation, Economic growth._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
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Clemens Fuest on Capital Gains Tax - Dictionary of Arguments
Fuest I 7 Capital tax/Piketty/Fuest: Piketty (2014)(1) argues that governments should use tax policy to fight trends towards increasing inequality. He proposes that governments should levy higher taxes on capital income and wealth. The ambition is that higher taxes on capital income will reduce the after-tax return to capital and thus tend to reduce inequality of income and, ultimately, wealth. Wealth taxes would address wealth inequality directly. Problems: This proposal raises two questions: Distribution: firstly, how effective are capital taxes as an instrument for redistributing income, that is for reducing the (after-tax) return on capital? Growth: Secondly, what are the implications of this proposal for economic growth? VsCapital tax: An important objection to using capital income taxes as an instrument for income redistribution is that trying to do so will be self-defeating if capital is internationally mobile. Countries with a high income tax burden attract less investment, and the investment they do attract is less profitable (Becker et al. 2012)(2). Secondly, countries may rely on residence-based capital income taxes. Residence-based taxation at the corporate level is not very effective if corporate headquarters are internationally mobile or corporate group structures can be adjusted (Becker and Fuest 2010)(3). International mobility is slightly less problematic when it comes to capital income taxation at the personal level. Distribution: Opponents of higher capital income taxes emphasize that these taxes reduce incentives to accumulate capital. If the rate of time preference is given and determines the after-tax return on savings in the long term, and capital markets are frictionless (Judd 1985)(4), it follows that taxes cannot reduce the rate of return to capital and the optimal tax rate on capital income is zero. Fuest I 8 But other authors (e.g. Piketty and Saez 2013(5)) have argued that the existence of bequests, combined with capital market imperfections, can lead to different conclusions, with positive optimal tax rates on capital income. From this perspective, capital income taxes have the purpose of (i) indirectly taxing bequests and (ii) providing insurance against uninsurable uncertainty regarding future returns on capital. Redisribution: Should capital income taxation be increased to achieve more income redistribution? For instance, would it be desirable to abolish dual income taxation and tax capital income at progressive rates, like labour income? For a long time the enforcement of residencebased taxes on capital income was undermined by tax evasion through bank accounts held abroad. This was an important reason for reducing tax rates on capital income. But recent developments in international information exchange for tax purposes, in particular supported by the OECD and the US government, have made it significantly more difficult for taxpayers to evade these taxes. Growth: How can the tax system be changed to achieve more economic growth? In the literature on the link between tax structures and economic growth, the view is widespread that capital income taxes, and particularly corporate income taxes, are harmful for growth. For instance, a widely recognized study about the impact of tax structures on economic growth conducted by the OECD (Johansson et al. 2008)(6) concludes: The reviewed evidence and the empirical work suggests a “tax and growth ranking” with recurrent taxes on immovable property being the least distortive tax instrument in terms of reducing long-run GDP per capita, followed by consumption taxes (and other property taxes), personal income taxes and corporate income taxes. The interpretation of the results in Johansson et al. (2008)(6) and the empirical approach used in this study are the subject of an ongoing and controversial debate (see Xing 2012)(7). 1. Piketty, T. (2014), Capital in the 21st Century, Cambridge, MA: Belknap 2. Becker, J, C. Fuest and N. Riedel (2012), “Corporate Tax Effects on the Quantity and Quality of FDI”, European Economic Review 56, 1495-1511. 3. Becker, J. and C. Fuest (2010). “Taxing Foreign Profits with International Mergers and Acquisitions, International Economic Review 51, 171-186. 4. Judd, K. (1985). “Redistributive Taxation in a Simple Perfect Foresight Model”, Journal of Public Economics 28, 59–83. 5. Piketty, T. and E. Saez (2013), “A Theory of Optimal Inheritance Taxation”, Econometrica 81, 1851-1886. 6. Johansson, Å., C. Heady, J. Arnold, B. Brys and L. Vartia (2008), Tax and Economic Growth, OECD Economics Department Working Paper 28. 7. Xing, J. (2012). “Tax Structure and Growth: How Robust Is the Empirical Evidence?”, Economics Letters 117, 379-382. Clemens Fuest, Andreas Peichl and Daniel Waldenström. Piketty’s r-g Model: Wealth Inequality and Tax Policy. https://www.ifo.de/DocDL/forum1-15-focus1.pdf_____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
Fuest I Clemens Fuest (ed.) George R. Zodrow Critical Issues in Taxation and Development (Cesifo Seminar Series) Cambridge, MA 2013 |
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