The Capital Gains Tax: It Should Be Reduced, Not Increased

It should be noted that the federal government has not yet clarified its intentions regarding the possibility of increasing the rate of inclusion of capital gains tax from 50% to 75%. Since this type of tax has detrimental effects, a policy change should go in the exact opposite direction, as other countries have done, and substantially reduce the capital gains tax or simply abolish it.

The capital gains tax is quite regressive. While some investors can easily avoid paying this tax by delaying the realization of their capital gains or investing in vehicles that do not generate capital gains, not everyone can easily do so.

Other groups, such as low and middle-income taxpayers, the elderly and less successful investors, generally have little financial flexibility and have much less discretion about when to earn capital gains.

Concern that is constantly increasing

Undoubtedly, those low and middle-income taxpayers, the elderly and less successful investors in a certain sense, are much more concerned with capital gains taxes than those with high incomes.

Thus, it is appropriate to clarify the harmful effects caused by the capital gains tax. Among them, mention could be made of the capital gain which is an increase in the value of an investment, calculated as the difference between the sale price of the asset and its original purchase price. When an investor sells something for more than the price paid for it, a capital gain is obtained.

Taxing capital is not the only detrimental effect of this tax. The capital gains tax also encourages people to block their investments. Unlike most types of income, obtaining capital gains is largely a matter of choice, and your opportunity can easily be modified by selling later.

Certainly this impairs economic growth because it discourages the reallocation of capital to its most productive uses. Research in the United States has suggested that for each 1% drop in the tax rate, capital gains realizations, and therefore the capital flow, increase by 1%.

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Source: Mathieu Bérard | IEDM/MEI