In these times of budget shortages, the taxation of capital gains is at the heart of the budget debate. The direction taken is to impose taxation in personal capital gains as income. Let us question about the merits of this approach?
Annual nature of the tax calculation
The tax calculation is always based on a rate multiplied by time in the space of a year basis. Is the time space of year good measure to understand the imposition of a capital gain? A non-obvious as a capital gain is acquired over several years and in a system where the tax rate is progressive, it can lead to higher taxation sometimes considered confiscatory.
However, the legislature is trying to correct this problem with a quotient system to reduce the progressivity of the tax. This is laudable; it allows a partial correction of the effects of progressivity.
Border between capital gain and income
The capital gain is the difference between the sale price and the purchase of asset. Income from a business or an asset held. Can you arbitrate between capital gains and income? Arbitration is possible in certain situations, such as high dividend can limit the amount of capital gains on securities. When arbitration is possible, a difference between the taxation of income and capital gains incentive to optimize taxation, this argues for taxation of income and capital gains in a common system. By cons, for other assets arbitration is not possible, we do not rent a building at a low rent to sell more expensive!
Gain and risk
To clear a profit, there is a risk necessarily taken on the initial investment. The risk is up to the complete loss of the initial investment. In open economic system, the risk deserves higher pay, this argument also applies in tax matters because if taxation plays against risk taking, which economic actor will accept risk taking?
Appreciation and inflation
When we apprehend the amount of capital gains, is it fair to make a difference between the price of today’s sale and the purchase price which may have been disbursed many years ago? Obviously not, because if both are expressed in nominal euros, part of the gain does not correspond to enrichment but to a loss of value of the currency.
As we see, beyond partisanship, the question is difficult and the answer is not simple. To date, we are moving towards a system where a capital gain is progressive rates and real estate gain proportional rate.