Last year's Budget presented by the Chancellor of the Exchequer, Gordon Brown, on March 17, 1998, proposed radical changes to the way the capital gains of individuals and trusts are to be taxed in the United Kingdom. These changes--and in particular the abolition of indexation for assets acquired after April 5, 1998, and the introduction of the preferential treatment of long term gains by the introduction of a tapering relief--reflect certain trends in capital gains tax ("CGT") regimes in some other parts of the world. But to a greater extent they highlight inconsistencies and contradictions, both within and between countries, in the manner in which capital gains are treated. Most countries in the Organisation for Economic Co-operation and Development ("OECD") have CGT regimes in place, and yet it is difficult to establish any coherent set of principles that are common to all, or even most countries. More than any other tax, CGT appears to be a tax without principle. This is surprising in a tax that has been around in one form or another for most of the twentieth century.The purpose of this paper is to examine the hypothesis that CGT is an unprincipled tax, and to explore the very different approaches to the taxation of capital gains that exist. It will do this by examining the way in which six English-speaking countries (the United Kingdom, Ireland, the U.S.A., Canada, New Zealand and Australia) have taxed capital gains (or, in the case of New Zealand, not formally taxed them). In Part Two a potted history of CGT in each of the six countries is used to show the contradictions within these countries and between them. This leads to an examination of the various differences that exist by reference to three major structural considerations--the tax base, the rate of tax and the degree to which preferences of various sorts are introduced. Finally, in Part Two, the inconsistencies are highlighted by way of a series of simple CGT calculations based on a common tax scenario in each of the six countries which show widely differing tax outcomes. Part Three seeks to explore the reasons for the inconsistent approaches that have been adopted and the internal contradictions that have occurred, whilst Part Four identifies a number of forces that may be at work to bring about a convergence of capital gains taxation over the longer term. In Part Five the authors offer some brief--and very tentative--thoughts on their approach to a more principled CGT.This material was first published by Sweet and Maxwell Limited in the British Tax Review and is reproduced by agreement with the Publishers
