The great capital gains tax hoax

Third, to brush off the accurate observation that a lower rate for “capital gains” favoured speculators, it was proposed that the lower rate should be available only after the asset was held for a certain time, or that there should be a series of tax rates, with lower rates for longer holding times. Never mind that whether an asset acquisition is productive or speculative depends on the type of asset and the use to which it is put, not the time for which it is held. And never mind that the speculators who can afford to wait longer are those who were richer in the first place.

These arguments, though invalid, were plausible enough to prevail when backed by the enormous campaigning power and advertising power of those who expected to gain from them. In Australia, for example, the richest 1 per cent of taxpayers (ranked by taxable income) receive only 5.3 per cent of all wages and salaries, but receive 38.6 per cent of all “capital gains” [source: Treasury, Architecture of Australia's tax and transfer system, August 2008, p.184].

So it is that in Australia and in most developed countries, speculative gains on land and land-like assets are taxed less heavily than income from productive investment or the sweat of one’s brow. In the USA, this has been the case since 1921. So it is that the Haig-Simons formulation, which in fact unreasonably favours asset owners over workers and other producers, is portrayed as a lunar left-wing footnote to the history of economic thought.

And so it was that on the August 6 edition of Lateline Business on Australia’s ABC TV, a statement that taxing income from capital can stifle economic growth (true) together with a call to reduce the level of taxation on constructive investments (fair enough) illogically morphed into a purely opportunistic attack on “capital gains tax”.

In view of the strong correlations between speculative gains, obscene wealth, and political influence, it is perhaps unrealistic to hope that public policy will ever be determined by anyone but the speculators or can ever be changed except by pandering to the speculators. But in the course of such pandering, one should draw attention to one powerful mechanism by which the speculators have become victims of their own political success.

Because governments don’t claw back a large share of unearned uplifts in land values, they don’t have much incentive to do things that cause such uplifts - e.g. investing in infrastructure. So desirable infrastructure projects languish for want of funding, and property speculators miss out on the associated “capital gains”.

It’s easy to say “Serves the speculators right!” But they are not the only ones who suffer.