This is the third level of tax.
First income taxes get taken out from what people earn.
Then a sales tax is applied to what is spent of the remaining.
Finally, if what remains increases in value, the increase in value is then taxed.
Why is tax on capital bad?
The asset doesn't belong to the government
Fundamentally the asset that is being taxed, doesn't belong to the Government, so why do they have a claim to the appreciation in value, if they don't have a claim to the asset itself.
The truth is that capital gains, prove that the asset doesn't belong to you, if it did you would keep all the value of it. The asset belongs to the government, and they let you keep some privileges of possessing that asset.
It is a form of triple taxation
In a simplified example:
The person in this table earns $100, spends $50 and dies leaving $20
The person has paid tax on the same money 3 times.
Despite none of the tax rates being over 40%, the person in this example pays a total of 48% of income in cumulative tax in the end.
It violates property rights
Its no longer what's mine is mine, its what's mine is the governments.
It penalises savers
Savers are thought of in society as doing the right thing and being responsible, but a capital tax penalises these very people. Most governments want their citizens to save more, at least they say they do, and this policy is contradictory.
Spenders are only taxed once.
It is levied unevenly
- As mentioned savers are hit more than spenders
- It is arbitrary, if you are taxed when your savings are at their peak, you will pay more than if they were taxed when they are low.(this includes dying at the "wrong time" or being taxed on unrealised gains that never get realised).
- Those with good accountants can usually find loopholes to minimise the costs, the rest must pay.
It is yet more administration
Not only are you taxed, but you have to give thought to how to minimised, taking you away from other activity's, and you may incur costs making sure you comply and lose even more money to accountants and Lawyers in the process. Those Accountants and lawyers are then working on capital tax rather than real productive work.
It is bad for the economy
- Capital taxes, take assets(savings) of taxpayers and turn them into expenses for the government. This creates an imbalance in the economy where there is not enough investment.
- It also changes the mix of peoples savings, expenses and investment. People knowing the rate of return is reduced from capital taxes may choose to holiday or spend it in other manners instead. The allocation of capital in the economy may then become sub-optimal.
- It reduces return on investment and hence demotivates people from gathering the investment moneys in the first place.
It keeps people dependent
Governments don't like people with savings, people with savings are not dependent on the government. They would rather take money off these people so that they could give some of it back with conditions and take credit.
It affects people at worst time
When you die or divorce capital gains kicks in, these are not good pieces of news, but having to sell assets to pay the tax bill at the same time, is like a kick being kicked when down.
"Let them learn this lesson, then; doubtless, capitals are good for those who possess them: who denies it? But they are also useful to those who have not yet been able to form them; and it is important to those who have them not, that others should have them."
This is the third level of tax.
