Controversial issue number two relates to the committee's proposal (which was in fact made subject to a number of caveats) that realised gains on sales of shares be treated as ordinary income and taxed at the standard rate of income tax. For the record, there has never been, as erroneously reported in the press, any recommendation for the wholesale introduction of a capital gains tax.
Why have we made this apparently unpopular suggestion? Again it comes back to the twin issues of equity and economic efficiency. From an equity standpoint, income derived from gains on sales of shares tend to be enjoyed by a greater number of persons in the higher as compared to the lower income deciles. The introduction of such a tax is likely therefore to improve the vertical equity of the system.
The general exclusion of the taxation of gains of a capital nature in our current system, may have significant implications for economic efficiency as well. In the face of this exclusion, individuals may change how they invest available capital and may distort economic behaviour by making capital income more attractive relative to labour income. Some individuals would attempt to swap wages for capital assets, such as stock options or real property, where available.
I would also encourage my colleagues in the private sector not to isolate this proposal from the package as a whole but rather to "do the math" in terms of the reform package's overall impact on their net tax liabilities. Transfer taxes and stamp duties are being either eliminated or significantly reduced across a broad range of asset classes. Labour taxes and therefore labour costs are being reduced; the standard rate of corporate income tax is reduced from 33 1/3 per cent to 25 per cent; the double-taxation of private company distributions is being eliminated. Will the impact of these measures on your bottom line be totally eroded by the taxes you will now pay on gains on sales of shares? I think not.
