As modern economies develop and become more financialised, I say zombified, increasing amounts of wealth come from capital gains. Logically governments want to tap in to these gains and it seems to make sense as it can act as a damper for rampant speculation, wealth inequality and capital valuations gone mad.
The thing is practically all this capital gain is caused by government policies which print money. Capital gains tax (cgt) ends up collecting more if the government inflates more. Which is a moral hazard and brings the whole nation into a ponzi. CGT encourages a cycle of business and government that moves more and more money into unproductive activities, capital speculation, government stimulation programs and fiscal irresponsibility. If you have CGT and it forms a significant part of your countries tax take, it is a sign something is wrong, its not healthy for an economy. Its an economy feeding on its own financialisation and it can't last on that alone, it needs more and more leverage to survive.
We see this in many developed countries. The intent of policy here often contradicts the actual effects. You get people doing nothing and just holding assets and governments destroying the value of currency (which destroys the value of employment contracts). You get more speculation and wealth inequality, not less.
Often the reason that CGT have been instigated is because the governments tax take from other methods has fallen and they need to fund things. The capital base of the country is high, but the economies are failing to grow and so pumping fake money into the system and collecting the overflow is attractive. Using this mechanism they can extract as much wealth from society as they like and as the countries capital base, built up over centuries is very deep a lot of money can come out without it being immediately noticed. This sly roundabout tax is very corrupt and only limited is our resistance. Resistance is also minimal becuase this on face value appears to impact the minority wealthy. The wealthy however employ debt and other mechanism to avoid this and what it really does is suck capital investment out of the economy which harms everyone.
Put plainly the government can use CGT to extract value from the public by making their house prices go up so much that their wages pail in comparison. House ownership becomes a persons main economic activity by the numbers. When the house is sold the government collect their percentage, the more its gone up the more they collect. The person still needs to live, and if they don't buy a house they don't participate in the inflating asset and this keeps them poor. So tpeople are forced to o buy houses and pay CGT. The government can control the house prices making sure they always go up so they always collect, more and more as they get greedier and their is little resistance if people think the tax is intended to reduce wealth gap and don't realise the hazard that it is funnelling money to the government both through the tax and through the money printing.
I feel like this deserves more all caps but I am going to hold back because even though CGT allone it a terrible wrought, it gets worse! Now we have talk in Australia of unrealised capital gains taxes. We are heading further into the dark and I will save that for a future post.