IDEAS home Printed from https://ideas.repec.org/p/ris/albaec/2021_006.html
   My bibliography  Save this paper

Should Canada’s Capital Gains Taxes be Increased or Reformed?

Author

Listed:
  • McMillan, Melville

    (University of Alberta, Department of Economics)

Abstract

Since being introduced in 1972, taxable capital gains in Canada have been based on partial inclusion of nominal capital gains (i.e., the difference between sale and purchase prices). The inclusion rates have varied between 50 and 75 percent but have been 50 percent since 2000. Recently, there has been discussion of increasing capital gains taxes by increasing the inclusion rate (back to) 75 percent. In this paper, I argue that the capital gains tax is a poorly designed and inequitable tax and so, rather than make another ad hoc adjustment to the inclusion rate, a superior option is to reform capital gains taxation by indexing for inflation so as to measure real capital gains (i.e., the increase in purchasing power that is realized). The Toronto Stock Exchange Composite Index and the index of consumer prices are used to determine 40 and 50 year sequences of the differences between real and nominal measures of capital gains under both 50 and 75 percent inclusion rates for an index asset held for 20, 10 and 5 years. The work demonstrates that taxable capital gains are over and under assessed considerably relative to real capital gains. For example, over the period 1996 to 2020, differences between the taxable capital gains under a 75 percent inclusion rate and real gains would have been about 20 percent for a 10-year hold and about 33 percent for a 5 year hold. The results demonstrate the varying disparities between real gains and those under partial inclusion. Such disparities imply wide differences in effective tax rates and so inequities among investors, over time and with other taxpayers. This evidence argues persuasively that Canada’s capital gains taxation should abandon partial inclusion and turn to serious reform by indexing for inflation.

Suggested Citation

  • McMillan, Melville, 2021. "Should Canada’s Capital Gains Taxes be Increased or Reformed?," Working Papers 2021-6, University of Alberta, Department of Economics.
  • Handle: RePEc:ris:albaec:2021_006
    as

    Download full text from publisher

    File URL: https://sites.ualberta.ca/~econwps/2021/wp2021-06.pdf
    File Function: Full text
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Auerbach, Alan J., 1989. "Capital Gains Taxation and Tax Reform," National Tax Journal, National Tax Association;National Tax Journal, vol. 42(3), pages 391-401, September.
    2. Auerbach, Alan J., 1989. "Capital Gains Taxation and Tax Reform," National Tax Journal, National Tax Association, vol. 42(3), pages 391-401, September.
    3. Martin Feldstein & Joel Slemrod, 1983. "Inflation and the Excess Taxation of Capital Gains on Corporate Stock," NBER Chapters, in: Inflation, Tax Rules, and Capital Formation, pages 101-115, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Benjamin C. Ayers & Craig E. Lefanowicz & John R. Robinson, 2007. "Capital Gains Taxes and Acquisition Activity: Evidence of the Lock†in Effect," Contemporary Accounting Research, John Wiley & Sons, vol. 24(2), pages 315-344, June.
    2. McGee, M. Kevin, 1998. "Capital Gains Taxation and New Firm Investment," National Tax Journal, National Tax Association, vol. 51(n. 4), pages 653-73, December.
    3. Hendershott, Patric H. & Toder, Eric J. & Won, Yunhi, 1991. "Effects of Capital Gains Taxes on Revenue and Economic Efficiency," National Tax Journal, National Tax Association;National Tax Journal, vol. 44(1), pages 21-40, March.
    4. Hendershott, Patric H. & Toder, Eric J. & Won, Yunhi, 1991. "Effects of Capital Gains Taxes on Revenue and Economic Efficiency," National Tax Journal, National Tax Association, vol. 44(1), pages 21-40, March.
    5. John Diamond, 2005. "Dynamic Effects of Extending the 2001 and 2003 Income Tax Cuts," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 12(2), pages 165-192, March.
    6. McGee, M. Kevin, 1998. "Capital Gains Taxation and New Firm Investment," National Tax Journal, National Tax Association;National Tax Journal, vol. 51(4), pages 653-673, December.
    7. Hernán Rincón-Castro & Juan Pablo Ángel-Mojica, 2023. "¿Sobre quién recaería la carga de reducir el impuesto sobre la renta de las empresas?," Borradores de Economia 1260, Banco de la Republica de Colombia.
    8. Burman, Leonard E & Randolph, William C, 1994. "Measuring Permanent Responses to Capital-Gains Tax Changes in Panel Data," American Economic Review, American Economic Association, vol. 84(4), pages 794-809, September.
    9. Auten, Gerald & Joulfaian, David, 2001. "Bequest taxes and capital gains realizations," Journal of Public Economics, Elsevier, vol. 81(2), pages 213-229, August.
    10. Jeff Larrimore & Richard V. Burkhauser & Gerald Auten & Philip Armour, 2016. "Recent Trends in U.S. Top Income Shares in Tax Record Data Using More Comprehensive Measures of Income Including Accrued Capital Gains," NBER Working Papers 23007, National Bureau of Economic Research, Inc.
    11. Philip Armour & Richard V. Burkhauser & Jeff Larrimore, 2013. "Levels and Trends in United States Income and Its Distribution A Crosswalk from Market Income Towards a Comprehensive Haig-Simons Income Approach," NBER Working Papers 19110, National Bureau of Economic Research, Inc.
    12. Sureth, Caren & Voß, Armin, 2005. "Investitionsbereitschaft und zeitliche Indifferenz bei Realinvestitionen unter Unsicherheit und Steuern," arqus Discussion Papers in Quantitative Tax Research 2, arqus - Arbeitskreis Quantitative Steuerlehre.
    13. Philip Armour & Richard V. Burkhauser & Jeff Larrimore, 2014. "Levels and Trends in U.S. Income and its Distribution: A Crosswalk from Market Income towards a Comprehensive Haig‐Simons Income Approach," Southern Economic Journal, John Wiley & Sons, vol. 81(2), pages 271-293, October.
    14. Annika Hegemann & Angela Kunoth & Kristina Rupp & Caren Sureth-Sloane, 2017. "Hold or sell? How capital gains taxation affects holding decisions," Review of Managerial Science, Springer, vol. 11(3), pages 571-603, July.
    15. Jacob, Martin, 2011. "Tax Regimes and Capital Gains Realizations," Working Paper Series, Center for Fiscal Studies 2011:9, Uppsala University, Department of Economics.
    16. Viard, Alan D., 2000. "Dynamic asset pricing effects and incidence of realization-based capital gains taxes," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 465-488, October.
    17. Richard Burkhauser & Markus Hahn & Roger Wilkins, 2015. "Measuring top incomes using tax record data: a cautionary tale from Australia," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 13(2), pages 181-205, June.
    18. Auerbach, Alan J., 1996. "Measuring the Impact of Tax Reform," National Tax Journal, National Tax Association;National Tax Journal, vol. 49(4), pages 665-673, December.
    19. Patric H. Hendershott & Eric Toder & Yunhi Won, 1990. "Revenue and Welfare Implications for a Capital Gains Tax Cut," NBER Working Papers 3386, National Bureau of Economic Research, Inc.
    20. Niemann, Rainer & Sureth, Caren, 2009. "Investment effects of capital gains taxation under simultaneous investment and abandonment flexibility," arqus Discussion Papers in Quantitative Tax Research 77, arqus - Arbeitskreis Quantitative Steuerlehre.

    More about this item

    Keywords

    capital gains tax; inclusion rate; inflation; nominal versus real; indexing;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ris:albaec:2021_006. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joseph Marchand (email available below). General contact details of provider: https://edirc.repec.org/data/deualca.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.