The Pivotal Role of Capital Gains in Efficient and Progressive Tax Reform

Jonathan Rhys Kesselman ()
Additional contact information
Jonathan Rhys Kesselman: School of Public Policy, Simon Fraser University, Vancouver

Canadian Tax Journal, 2024, vol. 72, issue 1, 1-32

Abstract: Increased, targeted taxation of capital gains is key to making the personal income tax more progressive, and it can also contribute to a more efficient system. This article assesses a two-tier capital gains tax that would apply a second, higher inclusion rate for gains above a specified threshold. Relative to a general increase in the inclusion rate—widely promoted by tax analysts—a two-tier scheme would focus on high-income, high-wealth taxpayers, forgo limited revenue, and be more publicly acceptable and politically viable. Relative to reforms to the alternative minimum tax (AMT), the two-tier scheme would be simpler, cover more taxpayers, capture more revenue, and conform more closely to the notion that "the rich pay their fair share." The article explains how capital gains are an amalgam of capital and labour inputs, often containing supernormal returns that are an efficient target for increased taxation. The article further details the high concentration of recurrent large capital gains at top income levels and critically assesses arguments commonly made against raising the gains inclusion rate. It also identifies desirable companion measures for a two-tier gains tax—including restoration of income averaging and abolition of the federal 33 percent top tax bracket and the AMT itself. In short, the current 50 percent capital gains deduction serves as a gateway for endless tax-minimizing and economy-distorting stratagems. Closing that gate even partway for those most prone to enter into such planning would be pivotal in making Canada's tax system both more efficient and more progressive.

Keywords: Capital gains; tax reform; alternative minimum tax; tax avoidance; deferral method; Canada-US (search for similar items in EconPapers)
Date: 2024
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.ctf.ca/EN/Publications/CTJ_Contents/2024CTJ1.aspx (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ctf:journl:v:72:y:2024:i:1:p:1-32

Ordering information: This journal article can be ordered from
Canadian Tax Foundation, 145 Wellington Street West, Suite 1400, Toronto, Ontario, Canada M5J 1H8
https://www.ctf.ca/E ... ns_ListingBooks.aspx

DOI: 10.32721/ctj.2024.72.1.kesselman

Access Statistics for this article

Canadian Tax Journal is currently edited by Kim Brooks, Kevin Milligan, and Daniel Sandler

More articles in Canadian Tax Journal from Canadian Tax Foundation Canadian Tax Foundation, 145 Wellington Street West, Suite 1400, Toronto, Ontario, Canada M5J 1H8.
Bibliographic data for series maintained by Jim Lyons ().