Question

Should the Australian Capital Gains Tax system have a 50% discount available to taxpayers?

Discuss this with reference to the criteria for evaluating tax policy:

• Economic efficiency

• Simplicity

• Equity/fairness

You should feel free to discuss any other relevant matters.

Answer 1

Yes in my view there should be a discount of 50% for the tax payers in Capital Gains.The reasons thereof stand as hereunder -

Economic Efficiency :

A lower rate will eliminate the tendency to hide such gains by the taxpayers.When the rate is high taxpayers tend to take chance to hide or under report the gains so as to escape the tax liability which in such cases is quite high.It pinches the taxpayers to pay high taxes and also since it is to be paid not on actaul receipt but when it accrues there is also an element of cash arrangement , which at times could be challengng for the tax payer to arrange.

A discounted rate will help increase in volumes of disclosures by eliminating the temptation among taxpayers to hide.Taxpayer would rather pay a low tax and be tension and hassle free.

Simplicity:

Both the two methods available for capital gains calculation viz Discount Method and Index method have their own complications.Again the choice given to adopt any method brings in confusion.In place of these if a flat rule of 50% discount in introduced will help the cause of taxpayers.

Equity/Fairness:

Capital Gains are not planned as these are windfall gains.These are attrubutable to sheer luck or at times to vision of an individual.To be fair and equitable the taxpayer should be allowed to enjoy the benefits of these windfalls or vision.At the same time State should also have its share as it is an important source of revenue.In order to have both objective achieved a lower (say 50% discounted rate) will help.Taxpayers will have more in their hand and State would have better volumes since there will be incentive on part of taxpayers.Loss on account of lowering the rate will get more than offset by the increased volumes.