Chrystia Freeland would drop the Canadian government’s policy of raising the capital gains inclusion rate if she wins the race to replace Justin Trudeau as prime minister, according to a person with knowledge of her plan.
How would that work? Stocks go up and down all the time. Sometimes people hold them for years, sometimes they trade them rapidly throughout the day.
Suppose we tax people on a percentage of the increases in their stocks when they go up. Are we going to give them a tax refund when the stocks go down? Or is it just going to be a ratchet that drains away all their money as the stock rapidly goes up and down throughout the day?
There’s a lot of different things you can do but at the end of the day the question is: will people still want to keep investing after you make the change? If the answer is no, then why not simply shut down the stock market altogether? Of course the answer to that is that everyone will start investing through a black market.
The really hard part about tax policy is that you can’t just look at the way things are now and then assume they’ll stay the same while you collect a tax off the top. In reality, people change their behaviour to avoid taxes as much as possible so taxes on specific things tend to have distortionary effects on the market.
If you want a very good example of a non-distortionary tax, look at land value taxes. The beautiful thing about them is that you can’t take your ball and go home. You can’t move the land with you to another country (not without an army anyway). You can’t even destroy the value of the land (for LVT purposes) by say, burning down the buildings, because LVT is based on the value of the land without any buildings or other improvements. All you can do is pay the tax or sell.
We tax the theoretical assessed value of houses, why not stocks?
How would that work? Stocks go up and down all the time. Sometimes people hold them for years, sometimes they trade them rapidly throughout the day.
Suppose we tax people on a percentage of the increases in their stocks when they go up. Are we going to give them a tax refund when the stocks go down? Or is it just going to be a ratchet that drains away all their money as the stock rapidly goes up and down throughout the day?
There’s a lot of different things you can do but at the end of the day the question is: will people still want to keep investing after you make the change? If the answer is no, then why not simply shut down the stock market altogether? Of course the answer to that is that everyone will start investing through a black market.
The really hard part about tax policy is that you can’t just look at the way things are now and then assume they’ll stay the same while you collect a tax off the top. In reality, people change their behaviour to avoid taxes as much as possible so taxes on specific things tend to have distortionary effects on the market.
If you want a very good example of a non-distortionary tax, look at land value taxes. The beautiful thing about them is that you can’t take your ball and go home. You can’t move the land with you to another country (not without an army anyway). You can’t even destroy the value of the land (for LVT purposes) by say, burning down the buildings, because LVT is based on the value of the land without any buildings or other improvements. All you can do is pay the tax or sell.