No CrossRef data available.
We use cookies to distinguish you from other users and to provide you with a better experience on our websites. Close this message to accept cookies or find out how to manage your cookie settings.
We use cookies to distinguish you from other users and to provide you with a better experience on our websites. Close this message to accept cookies or find out how to manage your cookie settings.
Published online by Cambridge University Press: 07 November 2014
Few areas of taxation have been the subject of more controversy than capital gains and losses. In some countries, Canada for example, capital gains are excluded from the concept of taxable income, while in others such gains are partially excluded or are subjected to preferential tax rates. This article is divided into two parts. The first deals with the economic nature of capital gains and the relation of these gains to ordinary income. The second examines critically the arguments for and against the taxation of such gains. Basically, it will be argued that there is no fundamental fiscal difference between capital gains and “ordinary” income which could justify preferential tax treatment of the former. While the two types of personal economic accretion exhibit superficial distinctions, these are of little, if any, relevance from the standpoint of the income tax. It is admitted that more complete taxation of capital gains will present some complications. While the problems are suggested, their solutions are properly left to the lawyer, accountant, and legislator. Suffice it to say that solutions exist.
The conceptual distinction between capital gains and ordinary income has been described as follows:
In both law and common speech, capital gains are generally regarded as the profits realized from increases in the market value of any assets that are not a part of the owner's stock-in-trade or that he does not regularly offer for sale; and capital losses, as the losses realized from declines in the market value of such assets. Ordinary profits and losses, in contrast, are realized on the sale of goods and services that are a part of the seller's stock-in-trade or that he regularly offers for sale.
1 For a historical treatment see Goffman, Irving J., “The Tax Treatment of Capital Gains in Canada,” National Tax Journal, XIV, no. 4, 12, 1961, 356–62.Google Scholar
2 Seltzer, Lawrence H., The Nature and Tax Treatment of Capital Gains and Losses (New York, 1951), 3.Google Scholar
3 The reader is not to infer from this that values of land and stocks have moved only in an upward direction. Capital losses are not a rare phenomenon, and more cases of this nature can probably be cited than of those mentioned above.
4 Cf. Pigou, A. C., A Study in Public Finance (3rd and rev. ed., London, 1947), 156 Google Scholar; Hicks, J. R., Value and Capital (Oxford, 1939), chap, XIVGoogle Scholar; Myrdal, Gunnar, Monetary Equilibrium (London, 1939), 59–62 Google Scholar; Keynes, J. M., The General Theory of Employment, Interest and Money (New York, 1936), 52–61.Google Scholar
5 National Income, 1954 Supplement (Washington, DC: Dept. of Commerce, 1954), 58.Google Scholar
6 For example, discoveries of new resources on the one hand and destruction by fire and earthquake on the other.
7 Kuznets, Simon, National Income and Its Composition, 1919–1938 (New York, 1941), 12–14.Google Scholar The two volumes in this study are the standard references on national income analysis. For a description of the national accounts in the United States and Canada, see the Department of Commerce's Survey of Current Business, 1954 Supplement, and the Dominion Bureau of Statistics' National Accounts-Income and Expenditure, 1926–1956 (Ottawa, 1958).Google Scholar
8 Hicks, , Value and Capital, 179.Google Scholar
9 Shoup, Carl S., Principles of National Income Analysis (Boston, 1947), 116–19.Google Scholar
10 Copeland, M. A. and Martin, E. M., “The Correlation of Wealth and Income for Price Changes,” in Studies in Income and Wealth (New York, 1938), II, 242.Google Scholar
11 Seltzer, , Nature and Tax Treatment of Capital Gains and Losses, 53 Google Scholar; see Pigou on windfalls in A Study in Public Finance, 156–64.
12 Seltzer, , Nature and Tax Treatment of Capital Gains and Losses, 54–64.Google Scholar
13 Keynes, , General Theory, 149–50.Google Scholar
14 Seltzer, , Nature and Tax Treatment of Capital Gains and Losses, p. 56.Google Scholar
15 Ibid., 61; see also Knight, Frank H., Risk, Uncertainty and Profit (London, 1933), passim.Google Scholar
16 Cited in ibid., 83.
17 Cited in Wueller, P. H., “Concepts of Taxable Income: The German Contribution,” Political Science Quarterly, LIII, 03, 1938, 105.Google Scholar
18 Cited in Heller, Walter, “Investors' Decisions, Equity, and the Capital Gains Tax,” Federal Tax Policy for Economic Growth and Stability, Papers Submitted by Panelists, Joint Committee on the Economic Report, 84th Congress, 11. 9, 1955 (Washington, DC, 1956), 392.Google Scholar
19 Heller, Walter, “Appraisal of the Administration's Tax Policy,” National Tax Journal, VIII, no. 1, 03, 1955, 26.Google Scholar
20 Actually, the funds can be diverted from current consumption rather than current saving. However, it seems reasonable to suppose that unexpected receipts are not counted on to meet ordinary consumption, nor are the consumption habits of the recipient likely to rise immediately to absorb them.
21 There is one limited exception, the case of a tax which is so high as to absorb the funds necessary to maintain the property and allow for its replacement.
22 Seltzer, , Nature and Tax Treatment of Capital Gains and Losses, 86.Google Scholar
23 For example, the sale of a residence which was purchased originally in 1935 may yield substantial profits. However, to purchase another home identical to the one sold would probably absorb all of these profits.
24 Royal Commission on the Taxation of Profits and Income, Final Report (London, 1955), 29.Google Scholar
25 Vickrey, W., Agenda for Progressive Taxation (New York, 1947), 138.Google Scholar
26 Simons, H., Personal Income Taxation (Chicago, 1938), 153.Google Scholar
27 Vickrey, , Agenda for Progressive Taxation, 138.Google Scholar
28 See, for example, the Supreme Court's decision in Eisner v. Macomber, 252 U.S. 189 (1920).
29 Joint Committee on the Economic Report, The Federal Revenue System: Facts and Problems (Washington, DC, 1956), 30.Google Scholar
30 Vickrey, , Agenda for Progressive Taxation, 145.Google Scholar
31 While our present study leads us to the conclusion that capital gains, by virtue of their economic nature, ought to be taxed as ordinary income in order to establish an equitable tax structure, other objectives might lead to different conclusions. For example, it has been argued that regardless of equity, the taxation of such gains freezes investors in existing investments, and hence would impair economic growth. This has been referred to as the “locked-in” problem and has been a subject of controversy among economists for some time. In support of this position see Somers, H. M., “Reconsideration of the Capital Gains Tax,” National Tax Journal, XIII, no. 4, 12, 1960, 289–309.Google Scholar For a criticism of this contention, see Richman, R. L., “Reconsideration of the Capital Gains Tax-A Comment,” National Tax Journal, XIV, no. 4, 12, 1961, 402–4Google Scholar, and Gemmill, R. F., “The Effect of the Capital Gains Tax on Asset Prices,” National Tax Journal, IX, no. 4, 12, 1956, 289–301.Google Scholar This issue has been excluded from the present study because it is not directly within the sphere of the income tax as a source of revenue. Its significance comes to the fore when one considers tax policy within a broader framework such as its influence on secular growth. Such an objective is not undesirable, but our present study is concerned only with the revenue and equity objectives of taxation.