Thursday, September 27, 2018

Capital Gains Tax is double theft

New Zealand's Labour-NZ First-Green coalition government plans to introduce a capital gains tax under the guise of a review of the tax system carried out by its Tax Working Group (TWG). The TWG says it hasn't yet made a decision on the merits of a capital gains tax, but given that it is headed by former Labour finance minister, Michael Cullen, who never saw a tax he didn't like, it seems very likely they will recommend it. 

The idea of a capital gains tax appeals to socialists because it is a manifestation of the envy they feel towards anyone who is wealthier than them. To paraphrase H. L. Mencken, a socialist is someone with the haunting fear that someone, somewhere may be better off than they are. Socialists regard taxation as not just a means to an end (i.e. big government and redistribution of wealth), but an end in itself (i.e. punishing the rich).

A capital gains tax is a particularly insidious form of taxation because it is in effect a form of double theft. Capital gains are the increase in value of an asset and, like all goods, the value increases due to two factors - scarcity or money inflation. In the case of real estate, the obvious target for a capital gains tax, the increase in value is due to both of these factors. Where the insult to injury comes about is that the government drives both of these factors. It is driving scarcity of property because of its draconian planning restrictions and building regulations, and it is driving property inflation because it has been increasing the money supply and directing the extra money through the banks into mortgage lending.

If the value of anything increases due to inflation, there is no net gain to the economy. Inflation merely redistributes wealth (but perhaps not the sort of redistribution that appeals to socialists). So a capital gains tax on property is the government taxing you for an illusory gain that it caused. The same pernicious effect occurs when your wages increase due to inflation and you are pushed into a higher tax bracket so you have to pay more tax without seeing any additional purchasing power from your income.

All taxation is theft, but taxation on an illusory gain that is created by the government is double theft.

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