Capital Gains: Tax Policy Alternatives

This paper considers the appropriateness of special treatment of gains and the capital gains exemption. Special consideration is given to the surviving exemption for small business and farm investments. The paper concludes that the deferral of taxation to realization should be retained for most gains and suggests that broad rollover relief is appropriate. The partial exclusion is considered too rough a policy instrument to be useful and, in the case of share investments, better replaced by an efficient integration system. The paper suggests elimination of the capital gains exemption. If incentives are appropriate, other methods should be considered. The author highlights the importance of loss offset rules and the overall tax rate in connection with risk-taking behaviour.