What might a non-ideological capital gains tax look like? 

Someone once told me that a test of being a socialist was whether you supported capital gains taxes. I pointed out that the New Zealand Treasury, the Reserve Bank of New Zealand, the IMF and the OECD all supported them.

Not explicitly – perhaps they are implicit socialists – but they all share the standard economic advice that taxation on the return on capital should be neutral, that it should be the same irrespective of where the investment is made. What they are concerned with is that a tax system should not distort investment behaviour by privileging entirely for tax reasons one investment over another. To do so results in inefficient investment and wasted savings.

I am with them. I support a capital gains tax as a way of improving our investment performance. So much so, that I would support using any additional receipts to reduce taxation on savings; I think it pernicious (and unjust to small savers) that the part of an interest payment which is to cover rising prices is taxed, so the government benefits from inflation. (Incidentally it is a view I formed during the Muldoon years of high inflation.) While I am not opposed to improving the tax base, if the government wants to spend more it should raise tax rates.

Taxing the real component of interest rates means we should tax only the real component of capital gains too. But we should not tax them retrospectively. If the tax is imposed from, say, 1 April 2015, then only the gains since that date would be taxed, and gains from the past left untaxed. The purpose of the tax is to influence investment behaviour. Before the date the investment has already occurred so it cannot be influenced. Not incidentally, a retrospective capital gains tax is a very erratic wealth tax; if one favours a wealth tax, then design it properly.

It is difficult to know the precise impact of a capital gain tax. It would discourage purchases of farm land and housing by foreigners, who find New Zealand attractive because capital gains are not taxed. As far as I can, see this does nothing for the performance of the New Zealand economy other than employ real estate agents, lawyers, valuers and the like. (I see no reason why the government should be subsidising them, which is the effect of not having a capital gains tax.)

It would also reduce speculation in the housing market with investors deploying their savings in more productive areas than oversized and under-utilised houses. However, the hard logic of a capital gains tax is that one’s first home should not be subject to capital gains tax; when you sell your home you make a capital gain but when you go on to buy another one you make a capital loss and they roughly cancel out. One could evolve a very complicated regime to deal with anomalies, but nobody would understand it – even the accountants and lawyers who made a mint out of exploiting it. A simple, commonsense and comprehensible approach is what is needed. (You would not levy a capital gains tax retrospectively on a house owned by a dead person. But as it became part of an estate the tax would start to be levied.)

You might wonder if homeowners were not taxed whether there would be any dampening of capital gains in housing. Multiple house owners and speculators would be taxed and would shift their investing elsewhere rather than the practice of tax avoidance that the erratic tax regime on investment generates. That would reduce nominal capital gains in the housing market, making it easier for those without first homes to buy in. That is what is meant by ‘knocking the top off the market’.

What about farmers? Sadly, far too many of them farm for capital gains rather than for a return from farm production. That would be discouraged. (It would make more sense then to get the real exchange rate down so that the extra profitability went into farm investment and production, rather than higher farm prices.)

The list of ‘socialist’ institutions favouring a capital gains tax did not did not include the Inland Revenue Department. They are very aware of the complexities of introducing such a tax. Earlier I illustrated a principle by suggesting what would happen if it was introduced on 1 April 2015. That is far too early. We need a working party to nut out the details (in which the devil lies). The 2010 Tax Working Group muffed the challenge. Sadly, there is no independent centre of expertise which could prepare a report. Unprepared, we will muddle on, wasting savings on inefficient speculative investment and wondering why the performance of New Zealand’s investment remains disappointing.

Comments (44)

by Charlie on January 18, 2015
Charlie

Lots of good reasons for a CGT which I agree with.

You forgot to mention:

1/ The revenue from an efficient CGT would lower the burden on other revenue streams.

2/ The lack of a CGT drives many New Zealanders toward higher risk investments when they should be putting more money into conservative options with high dividend yield.

OK so we agree CGT is a good idea in principle. Now think of a way it can be implemented without having to resort to far greater complexity in taxation and an overly intrusive IRD, who will be wanting to know how much you sold that old car for.

A thought: Could we get most of the benefits of a CGT without having the complexity and administration cost by introducing a land tax of some kind?

 

by Lee Churchman on January 18, 2015
Lee Churchman

What they are concerned with is that a tax system should not distort investment behaviour by privileging entirely for tax reasons one investment over another

Forgive me, but doesn't this assume that taxing them equally is non-distorted? That seems a dubious assumption to me, and one that seems common in economics. 

by Ross on January 18, 2015
Ross

If you buy a property with the firm intention of resale, it doesn’t matter how long you hold it—the gain on resale will be taxable (and any loss may be tax-deductible).

http://www.ird.govt.nz/resources/1/8/183605804358bfcf96fa964e9c145ab7/ir361.pdf

Brian, gains on property, as mentioned above, are already taxed. What is the problem?

by Ross on January 18, 2015
Ross

"If landlords are buying intending to make a profit - and hopefully most people do - then they have to pay tax on it when they sell it. Capital gains tax already exists in New Zealand..." ~ Shamubeel Eaqub

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11302213

 

by Eliza on January 18, 2015
Eliza

However, the hard logic of a capital gains tax is that one’s first home should not be subject to capital gains tax; when you sell your home you make a capital gain but when you go on to buy another one you make a capital loss and they roughly cancel out. 

Except the hard logic is that when you sell a house, there is nothing making you buy a house in the same segment of the market. And no-one is suggesting a capital gains tax of more than about 15%, so even with a tax on the home you live in it will still be much easier to buy your second property than your first.

Let's say you currently own a three bedroom house in central Auckland. In 15 years, the value of that home could easily triple or more. At this point, you sell up, and start looking for a smaller place further out with the intention of downsizing for retirement. Is keeping only 85% of your excessive windfall really such a hardship? 

If people without houses have to pay tax on the interest they earn from their savings even when they intend to use those savings to form a home deposit, it is unfair to exempt the house you live in from a capital gains tax. 

 

by Charlie on January 18, 2015
Charlie

Ross - I think you've misunderstood the tax law. Read the pamphlet you linked carefully.

 

by Charlie on January 18, 2015
Charlie

Eliza - you're a 100% right. It is plain daft to exempt the family home. For two reasons:

Firstly that exemption would make the tax a horrible mess to implement whilst giving opportunity for massive loopholes. (The Labour Party revealed their incompetence when the announced this policy before the last election)

Secondly, the 'family home' is part of the bigger problem. Those with money to invest have ploughed much of their capital into fancy homes rather than invest in more productive assets which we can sell. Even worse, we've dived into debt to get that fancy home, knowing there was likely a tax free profit at the end of the day. So the banks have serviced that market by borrowing money from overseas. We are a nation with granite tops in our kitchens, bathrooms en suite, a batch at the beach but grossly under-capitalised in manufacturing. All driven by the tax rules.

 

 

by Alan Johnstone on January 18, 2015
Alan Johnstone

"Let's say you currently own a three bedroom house in central Auckland. In 15 years, the value of that home could easily triple or more. At this point, you sell up, and start looking for a smaller place further out with the intention of downsizing for retirement. Is keeping only 85% of your excessive windfall really such a hardship?"

You picked a example that suits your apparent pre-existing views. How about a family having an extra child or taking on responsibility for an elderly or disabled relative and thus requiring extra space ? 

You'd effectively lock them out from being able to do these things. 


by Eliza on January 19, 2015
Eliza

 

Alan -   Not sure I follow you, how is someone with a property already and wanting to upsize going to be in a worse position than someone without a property and wanting to buy their first home? That just doesn't make any sense. And remember, property owners would still keep 85% of the capital gain! 
by Alan Johnstone on January 19, 2015
Alan Johnstone

It's got nothing to do with people without a property.

Scenario.

I own a house with a CV of 800k, I paid 400K with it.

My elderly mother needs more care and moves in with us, we require an additional bedroom with easier access. I can purchase such a house for $900k.

Why should I have to pay $60k to the state for the privilege of doing so? 

In practical terms, it's unrealised gain and shouldn't carry a tax obligation.

 

by mikesh on January 19, 2015
mikesh

"Why should I have to pay $60k to the state for the privilege of doing so? 

In practical terms, it's unrealised gain and shouldn't carry a tax obligation."

The same argument would apply to a landlord who sell one house and buys another; or even to one who re-invests the proceed on the stock exchange.

by Flat Eric on January 20, 2015
Flat Eric

Singapore manages a high rate of home ownership without a capital gains tax. I don't read of any concerns there with regard to under-investment in productive assets.

by Eliza on January 20, 2015
Eliza

1) A capital gains tax wouldn't be retroactive, so the $400,000 gain you've already made is safe - it's the next $400,000 I'm worried about.

2) We all pay tax for the privilege of going to work. But income generated when you sell an asset that has appreciated is not taxed. The revenue received through a capital gains tax that includes the "family home" could be used to reduce income taxes, leaving the vast majority better off.

3) Property is already unaffordable and prices are increasing faster than wage growth. This is why the position of non-owners is relevant. You can contemplate upsizing because you bought when houses were cheaper, so got a foot on the ladder. Sell a house, buy another house - even with a tax, you're in a much much better position than someone who didn't buy a property when you first did. You've made a real gain. 

4) In your scenario you've made $340,000 net by doing nothing. You don't have to use it to buy another property. For example, you could rent a bigger house to live in with your mother and also buy a yacht and a new car and a whole heap of other luxury goods because $340,000 is one hell of a lot of money.

by mikesh on January 21, 2015
mikesh

"2) We all pay tax for the privilege of going to work. But income generated when you sell an asset that has appreciated is not taxed. The revenue received through a capital gains tax that includes the "family home" could be used to reduce income taxes, leaving the vast majority better off."

A capital gain is not income. If it was we could all give up working and make a living selling houses to one another.

by mikesh on January 21, 2015
mikesh

A CGT is actually a tax on realized capital gains. Unrealized capital gains remain untaxed, which introduces an element of unfairness into a CGT. 

by Rab McDowell on January 23, 2015
Rab McDowell

I could consider a CGT

(1) as long as it was for capital gain and not just for nominal increase in value due to inflation otherwise you would be taxing inflation. Inflation is pernicious enough without having to reward the govt for its shonky policies. AND

(2) as long as part of the deal was a capital loss rebate. If it is to be non distortionary it needs to go both ways. So lets see what happens when we finally allow housing supply and price reform so NZ no longer has some of the most inaffordable housing in the world.

Actually I wouldn't get hung up on CGT. I would fix the real problem. making houses affordable so that prices don't keep spiralling.

by Brian Easton on January 27, 2015
Brian Easton

Charlie asks: ‘Could we get most of the benefits of a CGT without having the complexity and administration cost by introducing a land tax of some kind?’A land tax is a tax on wealth, a CGT is a tax on income. So they will have quite different effects. There may be a case for a land tax (or a comprehensive wealth tax) but that does not invalidate the case I set out for a CGT.

 

Lee Churchman says ‘doesn't this assume that taxing them equally is non-distorted? That seems a dubious assumption to me, and one that seems common in economics.’ Yes it is common in economic policy. It is based on the notion that as far as possible an individual’s investment decisions should be neutral (uninfluenced) by the tax system. What would be an alternative assumption?

 

Ross and others cite an IRD ruling that purchase of a property with ‘the firm intention of resale could result in the gains being taxed. I came across this while preparing the article. However it is an option which the IRD does not always take up. Tax lawyers would be better informed than me but I understand that it may be difficult to prove ‘firm intention’. Aside from that the IRD changing their practices would involve a retrospective taxes, I worry about practices which leave such a lot of discretion in the hands of the executive (an antipathy reinforced by what I read about goes on in Russia). If we want to make such a dramatic change to the rules, it should be done by a duly elected parliament.

 

I agree with Eliza and others, as did the article, that there are bound to be anomalies with any approach to CGT on first homes. At issue is to find a resolution which is simple to apply and understand – which is what I suggested. Alternatives welcome.

 

Eliza also said ‘If people without houses have to pay tax on the interest they earn from their savings even when they intend to use those savings to form a home deposit, it is unfair to exempt the house you live in from a capital gains tax.’ This raises issues conceptually different from a capital gains tax. It could be resolved by taxing the ‘imputed rent’ on an owner occupier home (gross market rent as if the owner was leasing the house to themselves less ‘landlord’s’ costs including interest payments on mortgage as well as insurance, maintenance and rates). Whenever this has been proposed it has raised such an outcry that it is has been relegated to the bottom of the too-hard basket.

 

Mikesh says ‘A capital gain is not income. If it was we could all give up working and make a living selling houses to one another.’ Don’t understand the first sentence – a realised capital gain can be converted into consumption. The second sentence could refer to the moneymen in the finance sector and look where that has got us. You can play these money-go-around games until you start using the proceeds to purchase real goods and services.

 

Rab McDowell: ‘Actually I wouldn't get hung up on CGT. I would fix the real problem. making houses affordable so that prices don't keep spiraling.’ But Rob, how to make houses affordable? Yes people live in them but also use them for speculative investments for their capital gains.

by mikesh on January 27, 2015
mikesh

"Mikesh says ‘A capital gain is not income. If it was we could all give up working and make a living selling houses to one another.’ Don’t understand the first sentence – a realised capital gain can be converted into consumption. The second sentence could refer to the moneymen in the finance sector and look where that has got us. You can play these money-go-around games until you start using the proceeds to purchase real goods and services."

The proceeds of any property sale can be "converted into consumption" but that doesn't mean that such proceeds count as income. It would seem rather odd if national income appeared to have increased without any new goods and services being produced. 

by mikesh on January 27, 2015
mikesh

"The second sentence could refer to the moneymen in the finance sector and look where that has got us. You can play these money-go-around games until you start using the proceeds to purchase real goods and services."

This just proves my point. These "money-go-round games" get us nowhere because they produce no income.

by Brian Easton on January 29, 2015
Brian Easton

Economist's formal definition of income is a bit tricky when prices changes, but practically it amounts to the maximum consumption that is possible in a period without reducing the value of one's assets.

Suppose there is no consumer inflation but the value of an asset increases from $1m to $1.1m over the period. Then one can consume the $100,000 over the period and still have the original $1m at the end. Hence that capital gain is an income.

by mikesh on January 29, 2015
mikesh

"Economist's formal definition of income is a bit tricky when prices changes, but practically it amounts to the maximum consumption that is possible in a period without reducing the value of one's assets."

If a property sells for, say, $500,000, we would have to say that prior to the sale the seller had an asset (property) worth that amount. After the sale he has an asset (cash) also worth $500,000. Presumably he would not be able to consume any of the latter without reducing his asset holding. Hence no income has been received.

by mikesh on January 29, 2015
mikesh

Your definition of income works very well when you are talking about the yield from an asset, eg rent received from a tenant can certainly be spent on consumption without reducing the value of one's asset. Though I'm not an economist and therefore not altogether familiar with way economists define things, I suspect you are applying that definition in an area outside its scope.

by Brian Easton on January 31, 2015
Brian Easton

I can assure you, Mikesh, that I have not applied the definition outside its scope. Indeed it was designed to deal with the sort of things which are puzzling you. 

Think of it in terms of balance sheets. At the beginning one has a property worth $500,000 shown in the balance sheet. At the end of the transaction the balance sheet shows a deposit in the bank of $500,000. There is no change in the net equity between the two balance sheets, hence there is no income. The maximum consumption possible between before and after the transaction without reducing the aggregate value of one’s asset is zilch. If one chooses to spend some of that cash, say $10,000, on consumption then the net equity is reduced by $10,000 and there has been dissaving.

This may seem like making heavy weather, but the inability to think it through led to one of the invalid Rogernomic justifications for privatisation of state assets.

by mikesh on January 31, 2015
mikesh

"I can assure you, Mikesh, that I have not applied the definition outside its scope. Indeed it was designed to deal with the sort of things which are puzzling you."

If you say so. You would know more about these matters than I. Nevertheless I would still maintain that income and capital gain are two very different things. I don't think the latter should be included in any definition of income.

The trouble is that if a house that I have sold realizes a capital gain then every other house in the street will usually have enjoyed a similar gain, without incurring any tax, so to tax my capital gain seems unfair. Various posters and commenters on various blog sites seem to be attempting to get around this objection by calling the capital gain "income" which clearly it is not.

"If one chooses to spend some of that cash, say $10,000, on consumption then the net equity is reduced by $10,000 and there has been dissaving."

That's what I said in my previous comment but one, although I spoke of there being no income rather than that there was dissaving if a part of the proceeds was spent..

by Brian Easton on February 01, 2015
Brian Easton

Economists know very well, Mikesh, that wealth and income are different: wealth is a stock, income is a flow. (Its like the difference between the distance you travel and the speed you travel.) That is why the definition included the notion of ‘period’ because a time definition is required to make the distinction.

Your problem seems to be that the increase in the value of an asset over time is called a ‘capital gain’. Perhaps we should call it something else – such as ‘income from asset value appreciation’ (IAVA) – and then you would have no problem.

In your last paragraph you make the case for an unrealised capital gains tax. Yes, there is a case for one but it is usually thought to be too administratively complicated. In any case the logic is that there is not a IAVA on your first home.

by mikesh on February 02, 2015
mikesh

Changing something's name doesn't change its nature.

I acknowledge that taxing unrealized capital gains would be administratively difficult, and of course I didn't suggest doing so. This is why I think a realized capital gain should not be taxed. Taxologists would take the view, I think, that similar things should receive similar tax treatment, and a capital gain is a capital gain whether it's realized or unrealized..

Incidentally, I don't think "flow" is a requisite for income. A one-off item could just as easily count as income. What makes for income is that some new production has been brought into being, or that some service has been provided, that others are prepared to pay for. Otherwise a payment is simply a transfer payment.

by Brian Easton on February 02, 2015
Brian Easton

 Mikesh: You are using the term 'income' differently, from economists.  Economists need a flow concept. we call it 'income', just as physicists need a flow concept they call 'velocity'. Careful analysis of the time dimension is fundamental in economics. 

We are back to Humpty Dumpty again. It is fine if you define your term rigorously but dont confuse it with the standard use. 

Incidentally you also confuse value of production with income. Again a tricky area.  (PS. Economists invariably assume it takes time to produce anything.) 

by mikesh on February 02, 2015
mikesh

Is a "flow" of borrowings income?

by mikesh on February 02, 2015
mikesh

"Incidentally you also confuse value of production with income. Again a tricky area."

I said nothing whatsoever about the "value" of production. All I have said is that a payment does not count as income unless it is a payment for goods produced or some service rendered.

Economists may feel a need to characterize income as a "flow", but something more is obviously needed for a satisfactory definition.

by mikesh on February 02, 2015
mikesh

Irrespective of how we define "income", the essence of my argument is that similar items should receive similar tax treatment and, as we are not able to tax unrealized capital gains, we should not tax realized capital gains either. This discussion of what constitutes "income" has arisen only because there are some who argue that a capital gain is "income" and therefore it should be taxed. However even if a capital gain was income I still think my "similar items" argument would hold.

There are also those who argue that a capital gains tax is desirable because it would discourage investment in housing and encourage investment in more productive areas. This is an argument in which I think the US Marines might be interested, but I would prefer to leave that debate for another day.

Nevertheless it has been a stimulating discussion.

by Brian Easton on February 03, 2015
Brian Easton

Mikesh.

Is a "flow" of borrowings income?
No. Check against the definition I gave above and you will easily see it is not.

I said nothing whatsoever about the "value" of production. All I have said is that a payment does not count as income unless it is a payment for goods produced or some service rendered.
“Value’ was used in its standard economic meaning as ‘market value’. Payments (measure in market value) are a receipt, some of which is an income to the producer.

Economists may feel a need to characterize income as a "flow", but something more is obviously needed for a satisfactory definition.
Economists don’t 'characterise' income as a flow. In their definition of income it is a flow. What you have said is not obvious to either the economics or accounting professions (I mean in their entirety) that their definition is not satisfactory.

Irrespective of how we define "income", the essence of my argument is that similar items should receive similar tax treatment and, as we are not able to tax unrealized capital gains, we should not tax realized capital gains either. This discussion of what constitutes "income" has arisen only because there are some who argue that a capital gain is "income" and therefore it should be taxed. However even if a capital gain was income I still think my "similar items" argument would hold.
Implementation of a tax regime has to be practical – I leave you to think of some of the obvious cases. Surely in the case of unrealised capital gain all that it happening is that it generates an unrealised tax liability which is realised when the capital gain is realised.

There are also those who argue that a capital gains tax is desirable because it would discourage investment in housing and encourage investment in more productive areas. This is an argument in which I think the US Marines might be interested, but I would prefer to leave that debate for another day.
Did not know the US Marines were into housing.

by mikesh on February 04, 2015
mikesh

"Surely in the case of unrealised capital gain all that it happening is that it generates an unrealised tax liability which is realised when the capital gain is realised."

Timing is surely important. The benefits that give rise to a capital gain are enjoyed in the here and now. A tax liability may be realized in the long term, but by that time, as Mr Keynes pointed out, it's very likely we'll all be dead.

Another problem with a CGT is that its introduction may preempt more effective options such as a land tax or  a property tax.

by mikesh on February 04, 2015
mikesh

"Did not know the US Marines were into housing."

Nevertheless I think they should be told.

by Brian Easton on February 08, 2015
Brian Easton

Thinking that a CGT (which is a tax on an income flow) is in some ways equivalent to a ;land tax or property tax (which is a tax on an asset stock) is, I'm afraid Mikesh, exactly the conceptual mistake you have been struggling with. , 

by mikesh on February 09, 2015
mikesh

A CGT can't possibly be a tax on an income flow since a capital gain is not income ( I thought we had demonstrated that).

Given that CGT is a tax on capital, a tax on land or property would be preferable since they could levied on a regular basis, yearly, half yearly, or whatever we decide, rather than occasionally when a property is sold. A land or property tax would also be fairer since it would tax everybody's land or property, not just a seller's. 

 

 

by Brian Easton on February 13, 2015
Brian Easton

Dear Mikesh,

You certainly have not demonstrated that a capital gain is not income (well not to anyone other than yourself). 

If you really want to continue to discuss these things in public you are going to have to sort out in your own mind the distinction between a stock and a flow, between capital and income. 

Please dont give anyone advice on the matter, They could end up in serious difficulties with the Department of Inland Revenue if they followed your advice.

Brian. 

by mikesh on February 14, 2015
mikesh

Dear Brian

By your own definition (or the economics profession's) a capital gain is not income because you can't spend it on consumption without reducing your capital. A property is capital regardless of its monetary value, or how it acquired that monetary value, and if it is sold the proceeds of the sale should therefore be regarded as capital. After all, if I sell a property and spend the entire proceeds on another of equivalent value, I would be no better off in terms of my capital holdings so I do not see why I should pay a tax of 15% of part of that capital. And if I did spend part of the proceeds on consumption, so what. We are all free to relinquish part of our capital for purposes of consumption whether or not a capital gain has occurred.

If I were advising someone on tax matters my advice would be in accordance with the law as it stood, even if, like Dickens' Mr Bumble, I considered that law to be "an ass". Which of course would be the case if a capital gains tax were added to the statute books.

Mikesh

by Brian Easton on February 20, 2015
Brian Easton

Please, please, please Mikesh, dont ever give tax advice even according to what you think the law is. Just say 'I dont understand the principles on which tax law is based nor the accountancy and economic theory which underpins it.'

It is the time dimension which has got you totally muddled. Another application. 

Suppose you have an asset which is valued at 100 on 1 January 2014, and you sell for 200 on 1 January 2015. In that year you have made a capital gain -- an increase in your income and capacity to consume of 100 over the year.

It is as simple as that. Income has a time dimension; capital does not. That is why the financial report of a company has a statement of financial performance and a statement of financial position, 

by mikesh on February 20, 2015
mikesh

I trust you will never take up the teaching of philosophy. You seem oblivious of the fact that ad hominem arguments prove nothing.

My background is in accounting. I do understand the difference between a "financial performance" statement and a statement of "financial position". I also understand that when an asset is revalued the difference is credited, not to a revenue account, but to a capital appreciation account. I also understand that when an asset is sold only the "excess depreciation" is treated as income. If the selling price exceeds the book value plus excess depreciation, the difference is considered a capital gain and is not taxable as income. There fairly sound reasons for this approach.  

 

by mikesh on February 21, 2015
mikesh

A further point which you seem to have missed is this: if I employ someone, thereby providing him with income, I deduct that income from my revenue account, and of course it's deductible for tax purposes. If a capital gain is "income" should not the payer of that "income", viz the purchaser of the asset, be entitled to a deduction on the same basis.

by mikesh on February 21, 2015
mikesh

Sorry. Please disregard my last comment. The argument is not valid.

by Brian Easton on February 27, 2015
Brian Easton

Dear Mikesh,

I notice you do not challenge the example I gave. So let’s put it into your framework of the statement of financial position.

That would show net equity at 100 on 1 January 2014 and 200 on 1 January 2015. The increment would come not from income but be credited as a capital appreciation or some such term. Ultimately it would show as an increase in equity which could be siphoned off some way to increase consumption. The reason for this practice is to avoid calling the increment in the accounts an ‘income’ in order to avoid it being taxed. But it is entirely a convention reflecting tax law and not underlying accounting, economic or legal principles.

Yes, I have not taught a lot of philosophy. But I do know that telling a student that he or she has not understood an argument is not ad hominem. I regret that you took it that way. The editorial policy of Pundit is clearly to avoid personal attacks. That was not my intention nor can it be taken from the literal meaning of what I have written.

by mikesh on February 28, 2015
mikesh

Suppose you have an asset which is valued at 100 on 1 January 2014, and you sell for 200 on 1 January 2015. In that year you have made a capital gain -- an increase in your income and capacity to consume of 100 over the year.

If you sell something worth $200 for $200 then there is no gain. Yes, there may have been a capital gain in the past but that is not "income" inasmuch as I can't spend it.

My own home is at present enjoying a reasonable capital gain at present but I haven't been aware of any increase in my spending power.

by mikesh on February 28, 2015
mikesh

Accusing someone of incompetence in tax matters is an ad hominem argument.

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