Macquarie Journal of Business Law
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MAHESWARAN SRIDARAN[*]
The Australian income tax regime on capital gains (‘the CGT regime’) was enacted in 1986. The government which enacted the CGT regime so enacted it largely on the perception that the CGT regime will enable the macro-level policy objective of horizontal equity to be satisfied better. This paper reviews whether that perception is largely correct. Whether that perception is largely correct or not is germane for the following reason. In order to be able to enact the CGT regime, the government which enacted it had to necessarily ensure, or it is reasonable to infer that government may have had to necessarily ensure, that the CGT regime also satisfied a number of macro-level policy objectives other than horizontal equity. And those other macro-level policy objectives are not necessarily wholly co-extensive with horizontal equity.
This paper identifies six macro-level policy objectives (other than horizontal equity) that the CGT regime may have had to satisfy at the time of its enactment and may have had to continue to satisfy after its enactment, in order to remain enacted. This paper then analyses whether the satisfaction of those six macro-level policy objectives (other than horizontal equity): did compromise the capacity of the CGT regime, as first enacted, to satisfy the macro-level policy objective of horizontal equity; and has compromised the capacity of the CGT regime, on incorporating amendments to that regime made subsequent to its first enactment, to satisfy the macro-level policy objective of horizontal equity.
Based on that analysis, this paper concludes that the perception (of the government which enacted the CGT regime) that the CGT regime will enable the macro-level policy objective of horizontal equity to be satisfied better is a perception that is largely correct.
The objective of this paper is to evaluate whether the Australian regime of income tax on capital gains (‘the CGT regime’) satisfies the macro-level policy objective of horizontal equity. Accordingly, two questions require to be addressed:
The perception relevant to the first of those two questions, as referred to throughout this paper, is the perception of the government which enacted the CGT regime.
In an earlier work,[1] I comprehensively addressed the first of those two questions, and concluded that first question should be answered in the affirmative.[2] That is, there, I concluded that the enactment, in 1986, of the CGT regime was actuated by a perception that the CGT regime will satisfy the macro-level policy objective of horizontal equity.[3] I also concluded there that the continuance of CGT regime, after its enactment, has also been based on the same perception.
This paper addresses the second of those two questions – of whether the perception the CGT regime will satisfy horizontal equity is largely correct – and answers that question in the affirmative.
This paper contains a comprehensive discussion of six of the macro-level policy objectives a tax system (such as the CGT regime) should satisfy. That discussion demonstrates that each of those macro-level policy objectives may not be necessarily wholly co-extensive with horizontal equity. And, therefore, that the satisfaction of horizontal equity (as a macro-level policy objective) by the CGT regime can potentially be compromised due to that regime also having to satisfy those other macro-level policy objectives.
In this paper, at the end of the discussion of each of those macro-level policy objectives (other than horizontal equity), one of the following two conclusions is drawn:
The bulk of the literature limits the enumeration of macro-level policy objectives that a tax system (such as the CGT regime) should satisfy to a small number of such macro-level policy objectives; that small number of macro-level policy objectives being those in terms of which analyses of tax policy analysts are generally carried out.[4] In this paper, an attempt has been made to formulate such an enumeration comprehensively, so as to ensure that the analysis developed in this paper is comprehensive. The following is an enumeration, which is not in any order of importance, of macro-level policy objectives a tax system (such as the CGT regime) should satisfy that has been thus formulated:
A discussion, in turn, of each of those macro-level policy objectives follows.
A comprehensive discussion of the macro-level policy objective of horizontal equity was set out in my earlier work.[12] That discussion, therefore, is not repeated in this paper.
‘Vertical equity’ has been defined as the requirement that those in a more advantageous economic situation pay a greater amount of taxes, relative to those in a less advantageous economic situation.[13]
At the time the CGT regime was enacted, as well as well before, Australia imposed income tax on individuals at progressive rates. That, therefore, was a manifestation that Australia, at the time the CGT regime was enacted, did regard vertical equity as a macro-level policy objective a tax system (such as the CGT regime) should satisfy.
The appropriateness of ‘vertical equity’ as a macro-level policy objective a tax system should satisfy is, at best, open to conflicting views. That position has been summarised well thus:
The case for progression, after a long critical look, thus turns out to be stubborn but uneasy. … It is hard to gain much comfort from the special arguments, however intricate their formulations, constructed on notions of benefit, sacrifice, ability to pay, or economic stability. The case has stronger appeal when progressive taxation is viewed as a means of reducing economic inequalities. But the case for more economic equality is itself perplexing. And the perplexity is greatly magnified for those in the quest for greater equality are unwilling to argue for radical changes in the fundamental institutions of the society.[14]
The conflicting views that pertain in Australia over whether vertical equity is an appropriate macro-level policy objective that a tax system should satisfy are evidenced by a work, published in 2004, by Lauchlan Chipman[15] and a work, published in 2004, by me[16] as a response to that work of Chipman.
Chipman, in his work, concluded that, in Australia, income tax on individuals should be imposed at a flat rate, and not at progressive rates, as currently happens.[17] Chipman formed that conclusion based on eight arguments:
Those eight arguments did not include an argument to the effect that a flat tax is, relative to a policy of progressive income tax rates imposed on individuals, conducive to the attainment of economic efficiency. Chipman, in his work, extensively canvassed the appropriateness of such an argument, but was not able to conclude that such an argument was tenable.[26]
I, in the work that I published as a response to the work of Chipman, contended that those eight arguments do not represent an exhaustive enumeration of arguments that should be addressed in concluding whether a flat tax is to be preferred over a policy of progressive income tax rates imposed on individuals.[27] I advanced nine arguments, as articulated by others before, as to why a flat tax cannot be regarded as being superior to a policy of progressive income tax rates imposed on individuals that had not been addressed in Chipman’s work.[28] Those arguments are:
Those conclusions, resulting from the work of respectively Chipman and myself, evidence the conflicting views that pertain in Australia over whether vertical equity is an appropriate macro-level policy objective that a tax system should satisfy. Each of those two sets of conflicting views is, considered in isolation, plausibly articulated, such that it is difficult to conclusively determine that one of them is superior to the other.[42]
The inability to conclusively determine so, however, does not affect the following conclusion that, in the context of vertical equity and comprehensively taxing capital gains in Australia, was highly material. That conclusion is that the failure to comprehensively tax capital gains in Australia will have nearly exclusively benefited the wealthy, as the bulk of capital gains in Australia is realised by the wealthy.[43] The failure to comprehensively tax capital gains in Australia will thus have caused a significant violation of vertical equity.[44] That is so as, even on conceding that conflicting views, each articulated equally plausibly, do pertain in Australia over whether vertical equity is an appropriate macro-level policy objective that a tax system should satisfy, there is no justification that the rich should pay a lesser proportion of their income as tax than the poor.[45]
An acknowledgment of that conclusion–which is that the failure to comprehensively tax capital gains in Australia will have nearly exclusively benefited the wealthy can be found in the Draft White Paper, which provided the immediate basis for the enactment of the CGT regime:
… The case for taxing income in the form of capital gains thus follows from the general case for comprehensiveness in the definition of the income tax base and is similarly grounded in terms of objectives of equity …[46]
That conclusion – which is that the failure to comprehensively tax capital gains in Australia will have nearly exclusively benefited the wealthy – underlay the enactment of the CGT regime so as to satisfy the macro-level policy objective of vertical equity. That same conclusion also underlay the enactment of the CGT regime so as to satisfy the macro-level policy objective of horizontal equity, as, if income that is made liable to income tax is legislated or judicially interpreted to exclude capital gains, a serious violation of horizontal equity does result.
That position is consistent with the analysis that there is generally no conflict between vertical equity and horizontal equity, an analysis which has been summarised well thus:
Whereas the label ‘vertical equity’ refers to a normative question, the label ‘horizontal equity’ states a normative conclusion: People with the same incomes (or other relevant economic measure) should pay the same amount of tax. However, these two dimensions of tax equity are not really distinct. Horizontal equity is just a logical implication of any traditional answer to the question of vertical equity. If tax justice is fully captured by a criterion that directs government to tax each level of income at a certain rate, it simply follows that people with the same pre-tax incomes should be taxed at the same rate.[47]
Following the Ralph Review, some significant changes were made to the CGT regime. All of those changes, bar one, violated horizontal equity.
The abolition of averaging was rationalised by the Ralph Review due to averaging contributing little to ‘encouraging investment or removing inflexibilities in the capital markets’.[48] And being susceptible to use ‘by a section of asset-holding community to reduce capital gains taxation to zero, or near to zero’, thus causing ‘considerable [horizontal] inequity’.[49]
Whether that rationalisation is wholly tenable is moot, in view of averaging having been enacted to seemingly restore a loss of horizontal equity inherent in the CGT regime taxing capital gains on a realisation, and not accruals, basis.[50] However, any violation of horizontal equity resulting from the abolition of averaging may somewhat be extenuated by the enactment of the CGT discount applicable to the disposal by a taxpayer (except a company) of assets owned by that taxpayer for at least 12 months.
The abolition of indexation after 30 September 1999 may, overall, promote the satisfaction of horizontal equity, as, with that abolition, generally all regimes, including the CGT regime, imposing income tax do not incorporate adjustments for the effects of inflation. That is so despite any violation of horizontal equity that may be caused by the CGT discount, as referred to in the paragraph just below.
The enactment of the CGT discount somewhat extenuated the violation of horizontal equity resulting from the abolition of averaging. However, the CGT discount also causes most capital gains to effectively be taxed at a rate of income tax much lower than the rate at which other forms of taxable income are taxed, and thus violates horizontal equity.
The Ralph Review rationalised the concessions comprising ‘small business CGT relief’ as necessary ‘to provide small business people with access to funds for retirement and expansion’.[51] Those concessions are discriminatory, as capital gains realised from the sale of assets of small businesses are, pursuant to those concessions, effectively taxed at a rate of income tax much lower than that at which other forms of capital gain (or any other taxable income) are taxed. Those concessions thus violate horizontal equity.
However, the violation of horizontal equity caused by those concessions is likely to be limited in extent. That is so as two of those concessions are unlikely to be availed of by any one taxpayer frequently. The first of those two concessions – the exemption of any capital gain made on the sale of business assets where the owners of those assets retire after such sale – can be availed of by any one taxpayer only on that taxpayer’s retirement. The second of those two concessions – the exemption of any capital gain made on the sale of business assets where those assets had been owned by the taxpayer selling those assets for at least 15 years – can be availed of by any one taxpayer only in relation to a business asset owned by that taxpayer for as long as 15 years.
Accordingly, though all of the significant changes that were made to the CGT regime following the Ralph Review, except the change limiting indexation only up to 30 September 1999, violated horizontal equity, that violation of horizontal equity, however, did not occur due to those changes satisfying the macro-level policy objective of vertical equity. Rather, those changes that did violate horizontal equity – the CGT discount (to the extent that it does not negate the effects of the abolition of averaging), and the concessions comprising ‘small business CGT relief’ – also violated vertical equity, as those changes are likely to benefit a segment of taxpayers who are relatively more wealthy.
The requirement that the CGT regime does satisfy the macro-level policy objective of vertical equity did not, accordingly, affect the perception that the CGT regime will satisfy the macro-level policy objective of horizontal equity being largely correct. And those changes to the CGT regime that have occurred since the enactment of that regime have not affected that perception being largely correct.
D Economic Efficiency
As noted in my earlier work:[52]
In comparison with any economic system in the entire history of humankind, a free-market economy must be regarded as one with a high, if not the one with the highest, performance rating, if that performance were to be judged in terms of the level of wealth produced due to the economic system.[55] Accordingly, the choice of a free-market economic system as the optimal means for accomplishment economic efficiency is a choice hard to impugn.
An income tax can affect the operation of a free-market economy in two ways: First, an income tax can cause an ‘income effect’.[56] Or, second, it can cause a ‘substitution effect’.[57]
An income effect is caused where a tax on income, as that tax reduces the spendable income of the taxpayer on whom that tax is imposed, induces that taxpayer to either work harder, save more, or employ her or his capital better, so as to restore that taxpayer’s post-tax income to negate that reduction.[58]
And a substitution effect is caused where a tax on income, as that tax reduces, with respect to a taxpayer on whom that tax is imposed, the spendable income that that taxpayer can earn from either working an additional unit of time or employing her or his capital better, induces that taxpayer to prefer leisure to work,[59] to save less, or be indifferent as to how that taxpayer’s capital is employed.[60] Accordingly, a substitution effect, caused by an income tax, is compounded where one type of income is taxed differently, or not taxed at all, relative to other types of income. That is so as then a taxpayer will be induced to convert income that is highly taxed to income that is taxed less; in other words, substitute income that is highly taxed with income that is taxed less.[61] A substitution effect may thus result if capital gains are not taxed, whilst other forms of income are taxed.[62]
An income effect does not impair, but rather promotes, economic efficiency.[63] Conversely, a substitution effect does impair economic efficiency, unless that substitution effect is offset by the impact of income effects.[64]
Accordingly, the avoidance (or, at least, the minimisation) of substitution effects that an income tax causes is conducive to the unfettered operation of a free-market economic system.
The unfettered operation of a free-market economic system essentially means that those of the public of a country that operates such a system who are most “efficient” (or “productive”) are allocated the largest share of that country’s scarce resources. There will, thus, be caused inequalities in income and wealth amongst those in that country, as well as collateral inequalities amongst them in social status and power that accompany income and wealth.[65] Two of potentially many significant manifestations of such inequalities in social status and power are:
Accordingly, the effects of an unfettered operation of a free-market economic system, and therefore economic efficiency, will generally not be wholly co-extensive with horizontal equity.
Despite that, there are those (some of considerable authority) who assert that the maintenance of an unfettered free-market economic system by any country is sacrosanct.[68] That assertion is generally principally based on four grounds:
All of those grounds, except the last one, are, on close review, not wholly tenable, for the following reasons.[73]
In practice, in all countries that are liberal democracies that essentially adopt a free-market economic system, private property and rights of individuals of those countries are necessarily, in some respects, circumscribed by government action. For instance, an individual is not allowed the freedom to engage in any occupation that she or he likes; in Australia, for instance, an individual must possess certain qualifications prescribed by government if she or he is to engage in the occupation of a medical practitioner.[74] And a large part of private property, such as company shares, is created by government action. Ownership of such property, and resulting rights, therefore, cannot be asserted by any individual generally without recourse to government initiated legislation.[75]
The ground that a free-market economic system helps to safeguard individuals’ political rights against encroachment by government has more substance, but that ground too is not wholly tenable. For instance, Scandinavian governments have generally exercised significant control over the economies of their respective countries, but they have done so without compromising the democratic institutions of those countries.[76] In contrast, previous fascist governments in Italy and Germany have, in those countries, suppressed democratic institutions, whilst largely maintaining a free-market economic system.[77]
The reward one receives, in a free-market economic system, for one’s contribution may not necessarily be ethical for a number of reasons, such as the following. One’s contribution can be influenced by factors such as one’s family background, privilege or status, factors which do not evenly apply to everyone in a country.[78] One’s contribution may also be influenced by physical or mental deformities.[79] And one’s contribution may be influenced, even significantly, by the contribution of others.[80] For instance, Bill Gates can never contribute the effort he does contribute to Microsoft, an effort which is highly valued by Microsoft as it rewards that effort to the tune of several million dollars, if not for the efforts of the entire workforce of Microsoft, most of whom are rewarded by Microsoft modestly relative to the reward Microsoft offers Bill Gates.
The ground that a free-market economic system is the economic system that best promotes economic efficiency (or economic growth) is, as noted above, a ground that is hard to impugn.[81] Accordingly, it is that ground which furnishes the most cogent basis for regarding economic efficiency (or, in other words, the causation of minimal disruption to the unfettered operation of the free-market economic system) as a macro-level policy objective that a tax system (such as the CGT regime) should satisfy. That is so despite economic efficiency, as explained above, generally not being wholly co-extensive with horizontal equity.[82]
The satisfaction of the macro-level policy objective of economic efficiency, accordingly, as explained above, essentially means that substitution effects that an income tax causes should be avoided (or, at least, minimised), for which, as explained above, all forms of income, including capital gains, should be made liable to income tax similarly. A failure to capture capital gains as being liable to income tax, accordingly, may, as explained above, compound the substitution effects that an income tax causes.
There is a view that the capture of capital gains as being liable to income tax (as the CGT regime does), rather than contributing to the avoidance (or minimisation) of substitution effects that an income tax causes, compounds such substitution effects, as such capture may disincline owners of assets to dispose of those assets, thereby inhibiting the free movement of capital from a less productive use to a more productive one.[83] That seeming disinclination of owners of assets to dispose of those assets is generally referred to as ‘the lock-in effect’.[84]
That view has seemingly never been confirmed or contradicted by conclusive empirical research.[85] That view has been countered by the following arguments, none of which has been confirmed or contradicted by conclusive empirical research:
The Draft White Paper stated:
… The case for taxing income in the form of capital gains thus follows from the general case for comprehensiveness in the definition of the income tax base and is similarly grounded in terms of objectives of equity, efficiency and combating tax avoidance …[92]
The meaning of that statement in the Draft White Paper is best decomposed thus:
Accordingly, in the enactment of the CGT regime, the requirement for satisfying the macro-level policy objective of economic efficiency was perceived to be significant, as was the requirement for satisfying the macro-level policy objective of horizontal equity. And that first requirement did not cause that second requirement to be compromised.
Of those changes made to the CGT regime following the Ralph Review, one change is of significance in relation to economic efficiency and horizontal equity. That change is the CGT discount that was made applicable with respect to capital gains realised by taxpayers, except companies, after 21 September 1999.
That CGT discount was rationalised by the Ralph Review as necessary in order to negate the ‘lock-in effect’, without offering any empirical analysis to support that rationale. Accordingly, in the view of the Ralph Review, that CGT discount was necessary in order that the CGT regime satisfies the macro-level policy objective of economic efficiency.
That CGT discount violates horizontal equity as those capital gains that are eligible to that CGT discount (and most capital gains would) become taxed effectively at a rate of income tax much lower than the rate at which other forms of taxable income are taxed. The effect of that violation of horizontal equity, however, is somewhat extenuated, as that violation negates the violation of horizontal equity resulting from the abolition (following the final report of the Ralph Review) of averaging. Accordingly, on balance, the net violation of horizontal equity which that CGT discount does cause may not be significant.
The requirement that the CGT regime does satisfy the macro-level policy objective of economic efficiency did not, accordingly, affect the perception that the CGT regime will satisfy the macro-level policy objective of horizontal equity being largely correct. And those changes to the CGT regime that have occurred since the enactment of that regime may have not affected that perception being largely correct.
As noted earlier,[93] at the time CGT was enacted in Australia, of those developed countries which have tax systems generally comparable to those of Australia, the USA, the UK, and Canada had already enacted regimes for the comprehensive taxation of capital gains.[94] As of 1990 (that is, just about four years after the CGT regime was enacted in Australia), all of Australia’s major trading partners (bar New Zealand) were taxing capital gains.[95]
That fact – which is that all Australia’s major trading partners (bar New Zealand) were taxing capital gains–cannot by itself be taken as necessarily having required that Australia enacts a regime for the comprehensive taxation of capital gains. However, that fact did mean that, if Australia did choose to enact a regime for the comprehensive taxation of capital gains (as Australia did, by way of the CGT regime), that choice would not have been incompatible with the tax systems of Australia’s major trading partners. Any lack of compatibility of the tax systems of Australia applicable to taxation of capital income, which includes capital gains, with corresponding tax systems of Australia’s major trading partners does possibly affect the level of Australia’s inbound and outbound capital flows.[96]
The Draft White Paper stated:
… The lack of general capital gains tax represents a structural defect in the income tax system which lies at the core of many avoidance arrangements: if income can be converted into or dressed up as capital gains, income tax can be avoided completely. The imposition of a capital gains tax would, therefore, strike at one of the foundations of tax avoidance in Australia. …[97]
Accordingly, the CGT regime was rightly perceived as being necessary to complement the income tax regime that was then obtaining, that is, obtaining before the enactment of the CGT regime.[98] For, with the enactment of the CGT regime, revenue lost by the Australian government through the avoidance of income tax by taxpayers converting income gains liable to income tax to untaxed capital gains will cease to be lost, as taxpayers will then cease to have an incentive to so convert income gains to capital gains.[99]
Absent the CGT regime, therefore, unlike its major trading partners (bar New Zealand), Australia lacked a basis, and therefore an entitlement, to exact income tax on a gain that is characterised as a capital gain, but which, if not for the absence the CGT regime, will have been characterised in its true form as an income gain. Australia was thus, in a fiscal sense, at a competitive structural disadvantage vis-à-vis its major trading partners before the CGT regime was enacted, as those countries (bar new Zealand) will have exacted tax from that gain irrespective of its form (that is, irrespective of whether it is a capital gain or an income gain) where either that gain is sourced in those countries or the entity deriving that gain is a tax-resident of those countries.
If the CGT regime was not enacted, with respect to Australian sourced capital gains derived by entities that were not tax-residents of Australia, therefore, Australia will have not had a basis, and therefore an entitlement, to exact any taxes. The country of residence of those entities, however, will have exacted taxes on those capital gains, as, as noted earlier, all of Australia’s major trading partners (bar New Zealand) were taxing capital gains. Australia was thus, in a fiscal sense, at a competitive structural disadvantage vis-à-vis its major trading partners before the CGT regime was enacted.
At the time the CGT regime was enacted, Australia had concluded a number of double tax avoidance treaties with other countries, but had not entered into any other like obligations, bi-laterally or multi-laterally, that potentially impinged on the CGT regime.[100]
With respect to those double tax avoidance treaties, Australia’s official position, as promulgated by the Commissioner – a position that has yet not been contested in court, but which has been the subject of some criticism[101] – was:
Accordingly, the enactment of the CGT regime did not cause a breach of conformity, on Australia’s part, of Australia’s treaty and other like obligations.
Of those changes made to the CGT regime following the Ralph Review, one change is of significance in relation to (on the one hand) satisfying the macro-level policy objective of Australia’s tax systems being compatible with tax systems of other countries and Australia maintaining conformity with its treaty and other like obligations, and (on the other) horizontal equity. That change is the CGT discount.
That CGT discount was rationalised by the Ralph Review as necessary in order to ensure that the concession offered in Australia to negate the ‘lock-in effect’ be akin to corresponding concessions available abroad. Accordingly, in the view of the Ralph Review, that CGT discount was necessary in order that the CGT regime satisfies the macro-level policy objective of Australia’s tax systems being compatible with tax systems of other countries.
That CGT discount violates horizontal equity as those capital gains that are eligible to that CGT discount (and most capital gains would) become taxed effectively at a rate of income tax much lower than the rate at which other forms of taxable income are taxed. The effect of that violation of horizontal equity, however, is somewhat extenuated, as that violation negates the violation of horizontal equity resulting from the abolition of averaging; the abolition of averaging was a change made to the CGT regime following the final report of the Ralph Review. Accordingly, on balance, the net violation of horizontal equity which that CGT discount does cause may not be significant.
Thus, in summary, with the enactment of the CGT regime, tax systems of Australia will have become more compatible than they would have been otherwise with tax systems of its major trading partners (bar New Zealand), and Australia will have not breached its conformity with its treaty and other like obligations. Accordingly, the requirement for satisfying the macro-level policy objective of Australia’s tax systems being compatible with tax systems of other countries and Australia maintaining conformity with its treaty and other like obligations did not affect the perception that the CGT regime will satisfy the macro-level policy objective of horizontal equity being largely correct. And those changes to the CGT regime that have occurred since the enactment of that regime may have not affected that perception being largely correct.
The simplicity of a tax system causes three possible effects:[104]
1 Substantive Simplicity
If the legislative provisions pertaining to that tax system are drafted in a manner that is comprehensible with ease and certainty, administration of that tax system and compliance with that tax system are made easier.[105]
2 Transactional Simplicity
If the legislative provisions pertaining to that tax system are drafted in a manner that the scope of those legislative provisions is cohesive, the potential for manufacturing transactions of such form that those transactions are not captured by those legislative provisions is minimised.[106] Therefore, administration of that tax system and compliance with that tax system are made easier where legislative provisions pertaining to that tax system are drafted in a manner that the scope of those legislative provisions is cohesive.[107]
3 Administrative and Compliance Simplicity
If a tax system is so designed that the record keeping and information processing required for the administration of that tax system and the compliance with that tax system are not elaborate, administration of that tax system and compliance with that tax system are made easier.[108]
In its Final Report, the Asprey Committee stated:
… It is on the ground of equity that, in the Committee’s view, the arguments for capital gains tax may reasonably be held to be so strong to overwhelm the admittedly strong case against it on grounds of simplicity.[109]
The recommendations in the Final Report of the Asprey Committee proved influential in the eventual enactment of the CGT regime, as that report was reviewed by the Economic Planning and Advisory Committee (appointed by the government which enacted the CGT regime) in the preparation of the Draft White Paper.
Accordingly, in the enactment of the CGT regime, the government of the day did concede that the satisfaction of the macro-level policy objective of simplicity will have to be compromised so as to satisfy the macro-level policy objective of horizontal equity. That concession, however, was made subject to a single significant exception.
In the interest of satisfying the macro-level policy objective of simplicity, the CGT regime (as enacted) taxed capital gains only when those capital gains are realised, rather than when they accrued. There is considerable authority for the view that the CGT regime, for it to optimally satisfy horizontal equity, should tax capital gains as they accrue.[110] Those authorities essentially reason that a taxpayer who has realised a capital gain and a taxpayer who has an accrued but unrealised capital gain of equal value are in a similar economic situation, and therefore taxing the former taxpayer (merely because that taxpayer has chosen to realise that capital gain) but not the latter taxpayer violates horizontal equity.
However, not any one country, as at the time CGT regime was enacted (or as of now), taxes all capital gains as they accrue.[111] That is so for two main reasons:
Those reasons have strong pragmatic relevance. The enactment of the CGT regime, in deference to those reasons, such as to tax capital gains only when those capital gains are realised, rather than when they accrue, however, did not amount to a significant compromise of the perception that the CGT regime will satisfy the macro-level policy objective of horizontal equity. That is so as, even if capital gains are not taxed when those capital gains accrue, taxing capital gains when those capital gains are realised, as the CGT regime does, is an option that better satisfies horizontal equity than not taxing capital gains at all.
Accordingly, the requirement that the CGT regime satisfies the macro-level policy objective of simplicity did compromise the capacity of the CGT regime to also satisfy the macro-level policy objective of horizontal equity. That compromise, though, was not of such significance as to displace the perception that the CGT regime will satisfy the macro-level policy objective of horizontal equity from being a perception that is largely correct. And no changes to the CGT regime have occurred since the enactment of that regime to affect that position.
A tax system should satisfy the macro-level policy objective of stability, so as to enable those potentially affected by that tax system to anticipate the incidence of that tax system with certainty.[114] Stability of a tax system, accordingly, comprises two features:
The first of those two features is comprehended by ‘substantive simplicity’, addressed above under the heading ‘Simplicity’. Only the second of those features, therefore, will be addressed under this heading.
The second of those two features of stability of a tax system, such as the CGT regime, is a macro-level policy objective whose satisfaction can be assessed as such only in hindsight (that is, after that tax system has been enacted).
Having been enacted, the CGT regime has, though it has been subject to some amendment, largely remained intact. And currently it is not the official policy of any prominent political party in Australia that the CGT regime should either completely or substantially be abolished.
What is pertinent, however, is the question of whether, in the enactment of the CGT regime, in order to ensure that that regime will remain enacted with minimal change, features that were incorporated in that regime amount to a significant compromise of the perception that the CGT regime will satisfy the macro-level policy objective of horizontal equity.
The CGT regime did contain a number of concessions, concessions which in large part were conceded by the government which enacted the CGT regime for reasons of political expedience. That is, if those concessions were not conceded by the government which enacted the CGT regime, it is unlikely that the CGT regime will have been enacted, or, even if it did get enacted, it is unlikely that it will have remained enacted without change.
Three of those concessions were of such nature that they violated horizontal equity. Those three concessions were:
The first of those concessions violated horizontal equity as taxpayers who realise capital gains from the disposal of their assets acquired before 20 September 1985 were being favoured relative to other taxpayers who realise capital gains otherwise of equal value.
The second of those concessions violated horizontal equity as adjustments for the effects of inflation, through indexation, were offered only under the CGT regime, but generally not under any other regime imposing income tax. Capital gains, which were eligible for such adjustments for the effects of inflation, were, accordingly, effectively taxed less than other forms of capital gain or income gain of equal value, thus violating horizontal equity.
The third of those concessions violated horizontal equity as that concession favours owner-occupiers of homes over those that are not. And, moreover, as that concession compounds the violation of horizontal equity arising from the failure in Australia to subject to income tax owner-occupiers of homes on imputed (economic) rent in respect of their homes.
There has not been any empirical research to establish how significant the violation of horizontal equity caused by each of those three concessions is. Accordingly, the conclusions noted below as to the significance of the violation of horizontal equity caused by each of those three concessions are based on anecdotal observation.
The first of those concessions, in effect, is narrower in scope when one considers the applicability of CGT event K6[117] and Subdivision 149-B, two provisions which (in certain circumstances) operate to deem assets acquired by a taxpayer before 20 September 1985 to be assets acquired by that taxpayer on or after 20 September 1985.
CGT event K6 effectively treats shares in a company or interests in a trust, which a taxpayer acquired before 20 September 1985, as having been acquired by that taxpayer on or after 20 September 1985, where the total assets of that company or trust comprise assets acquired by that company or trust on or after 20 September 1985 to the extent of at least 75% of the value of net assets of that company or trust.[118] CGT event K6 does not generally apply to companies whose shares, or trusts whose interests, are listed for quotation in the official list of an approved stock exchange.[119]
Subdivision 149-B effectively treats assets of a company or trust, which were acquired by that company or trust before 20 September 1985, as having been acquired by that company or trust on or after 20 September 1985, where the ultimate ownership of that company or trust has, to the extent of more than 50%, changed since 20 September 1985.[120] Subdivision 149-B does not generally apply to companies whose shares, or trusts whose interests, are listed for quotation in the official list of an approved stock exchange.[121]
The first of those concessions may not have caused a significant violation of horizontal equity for two reasons. First, that concession, in effect, is narrower in scope when one considers the applicability of CGT event K6[122] and Subdivision 149-B. Second, any violation of horizontal equity caused by that concession abates as time passes as, with the passage of time, the stock of assets acquired by a taxpayer before 20 September 1985 reduces, due to a change of ownership of those assets, on or after 20 September 1985, having to often necessarily occur.
The second of those concessions may not have caused a significant violation of horizontal equity as, over the past decade or so, the rates of inflation in Australia have considerably reduced, and have remained at low levels.[123] Thus, the adjustments for inflation, through indexation by reference to the Consumer Price Index, in calculating a capital gain assessable to CGT realised from the disposal of assets that taxpayers had owned for more than 12 months are likely to have been correspondingly low in value.
The violation of horizontal equity caused by the third of those concessions is hard to refute. However, strong pragmatic reasons did perhaps exist for the enactment of that concession. Three of those significant reasons are:
The third of those concessions, though it does violate horizontal equity, is unlikely to cause such violation to an extent of such significance as to compromise the capacity of the CGT regime overall to satisfy the macro-level policy objective of horizontal equity. That is especially so as, in Australia, as it is a developed country, home-ownership is relatively widespread such that the proportion of taxpayers in Australia who are not owner-occupiers of homes is relatively low.
Accordingly, the effects of those three concessions are unlikely to constitute a significant compromise of the perception that the CGT regime will satisfy the macro-level policy objective of horizontal equity.
The requirement that the CGT regime satisfies the macro-level policy objective of stability, accordingly, did compromise the capacity of the CGT regime to also satisfy the macro-level policy objective of horizontal equity. That compromise, though, was perhaps not of such significance as to displace the perception that the CGT regime will satisfy the macro-level policy objective of horizontal equity from being a perception that is largely correct. The fact that the CGT regime has largely remained intact and that currently it is not the official policy of any prominent political party in Australia that the CGT regime should either completely or substantially be abolished means that nothing has occurred since the enactment of the CGT regime to affect that position.
A tax system should satisfy the macro-level policy objective of yielding to the government the net revenue that that tax system is expected to yield.[130]
The net revenue that a tax system yields to a government is the gross tax revenue that tax system yields minus the administrative costs borne by that government in relation to that tax system.[131] In relation to the CGT regime, there are no statistics as to what administrative costs are borne by the government in relation to that regime.[132] Therefore, the analysis under this heading is limited to a review of the gross tax revenue that the CGT regime yields to the government.
The Draft White Paper estimated that a comprehensive tax on capital gains ‘could generate tax liabilities around $450 million in the fifth year of operation’.[133] That estimate was seemingly based on what a comprehensive tax on capital gains yielded the Canadian government, when such a tax was first enacted in Canada.[134] Following the government’s announcement that the regime of comprehensive tax on capital gains that is to be enacted will depart in some respects from that recommended in the Draft White Paper the then Treasurer announced that that amount of $450 million estimated in the Draft White Paper is revised to be $25 million.[135] In the event, the actual gross tax revenue yielded by the CGT regime has considerably exceeded that revised estimate announced by the then Treasurer,[136] and also has, relative to the Commonwealth government’s total gross tax revenue, been rising.[137]
Further, with the enactment of the CGT regime, tax revenue lost by the government through avoidance of income tax, by taxpayers converting income gains liable to income tax to untaxed capital gains, generally ceased to be lost, as taxpayers then ceased to have an incentive to so convert income gains to capital gains. The resulting increase in income tax, an increase which is correctly attributable to the enactment of the CGT regime, is not included in the gross tax revenue actually yielded by the CGT regime referred to in the paragraph just above, as there is currently no measure of that resulting increase in income tax.[138]
Accordingly, the CGT regime does satisfy the macro-level policy objective of yielding to the government the net revenue that that regime is expected to yield. Whether that satisfaction did compromise the perception that the CGT regime will satisfy the macro-level policy objective of horizontal equity becomes moot only in the following situation.
That situation is where the government which enacted the CGT regime was forced to incorporate in the CGT regime features that fail to satisfy horizontal equity, so as to ensure that that regime satisfies the macro-level policy objective of yielding to the government the net revenue that that regime is expected to yield. In the event, no such features were incorporated in the CGT regime; rather, what came to pass was the opposite. That is, the form in which the government which enacted the CGT regime was forced to enact the CGT regime was such that, as that regime in that form represented a departure in some respects from the regime for comprehensive taxation of capital gains which was recommended in the Draft White Paper, that regime caused not a gain but a loss of gross tax revenue yielded by that regime to the government.
The changes made to the CGT regime following the Ralph Review, except one, violated horizontal equity. That violation of horizontal equity, however, did not occur due to the government being forced to incorporate in the CGT regime those changes, so as to ensure that the CGT regime satisfies the macro-level policy objective of yielding to the government the net revenue that that regime is expected to yield. That is so as the remit of the Ralph Review was explicitly to the effect that its recommendations should be ‘revenue neutral’.[139]
Accordingly, the requirement that the CGT regime does satisfy the macro-level policy objective of yielding to the government the net revenue that that regime is expected to yield did not affect the perception that the CGT regime will satisfy the macro-level policy objective of horizontal equity being largely correct. And no changes to the CGT regime have occurred since the enactment of that regime to affect that perception being largely correct.
My earlier work addressed the question of whether the enactment of the CGT regime, and the continuance of the CGT regime after its enactment, was actuated by a perception that the CGT regime will satisfy the macro-level policy objective of horizontal equity.[140] And that question, in that work, was answered in the affirmative. This paper addressed the question of whether that perception is largely correct. A question which, based on the analysis recorded in this paper, is answered in the affirmative.
This paper contained a comprehensive discussion of six of the macro-level policy objectives a tax system, such as the CGT regime, should satisfy. That discussion was warranted, as each of those macro-level policy objectives is not necessarily wholly co-extensive with horizontal equity, in order to conclude whether the satisfaction of each of those macro-level policy objectives:
That discussion resulted, with respect to each of those macro-level policy objectives (other than horizontal equity), in one of the two following conclusions essentially being drawn:
The first of those two conclusions was drawn with respect to the following macro-level policy objectives:
The second of those two conclusions was drawn with respect to the following macro-level policy objectives:
Despite that perception that the CGT regime will satisfy the macro-level policy objective of horizontal equity, the question as to what reasons could, in theory, cause the CGT regime to produce micro-level outcomes that fail to satisfy horizontal equity (that is, outcomes that violate horizontal equity) is a question that is addressed in my subsequent research that is hoped to be published soon.[141]
[*] This paper is authored by Maheswaran Sridaran, who is a lecturer in tax law at Macquarie University, Sydney. The author is also a doctoral student at the Division of Law of the same university, and this paper is based on Chapter 4 of his draft doctoral thesis. Responsibility for the contents of this paper is exclusively the author’s. The author may be reached by e-mail at m.sridaran@ozemail.com.au.
[1] M Sridaran, ‘Taxation of Capital Gains: A Review of the Australian Perception’ (2005) 20(1) Australian Tax Forum 41. The tax commonly referred to in Australia as ‘the capital gains tax’ is in fact comprehended by the income tax (and is not a separate tax, as in the UK), but the legislative provisions imposing that tax (at the time that tax was first enacted) were largely modelled on comparable legislative provisions that then obtained in the UK.
[2] Ibid 69, 71-72, 81: The Draft White Paper (whose citation is given in note 46, and which provided the immediate basis for the enactment of the CGT regime) and the Final Report of the Asprey Committee (whose citation is given in note 109, and which served as a most influential source of reference in the preparation of the Draft White Paper) both strongly recommended that (in Australia) there should be comprehensive taxation of capital gains, primarily on the ground that such taxation will enable horizontal equity to be satisfied better.
[3] Sridaran, above n 1, 57: ‘Horizontal equity’ requires those in an equal economic situation to pay an equal amount of taxes, and, by extension, those not in an equal economic situation not to pay an equal amount of taxes. There, there is an extensive discussion of concepts of equity as applicable to taxation.
[4] For instance, see M McKerchar, The Impact of Complexity upon Tax Compliance: A Study of Australian Personal Taxpayers (2003): C Evans, Taxing Personal Capital Gains: Operating Cost Implications (2003). McKerchar canvassed three sets of macro-level policy objectives that a tax system should satisfy. Those three sets were not mutually exclusive; rather each of those sets was seemingly purported to cover the same ambit as the other two, though each was articulated differently to the other two. First, McKerchar, based on the work of Adam Smith (written as far back as 1776, when circumstances impinging on public finance were, at the least in some respects, markedly different to those as of now), canvassed four macro-level policy objectives that a tax system should satisfy, which were equality, certainty, convenience of payment, and economy in collection (24). Second, McKerchar, based on the work of the Asprey Committee (see n 109 for citation), canvassed three macro-level policy objectives that a tax system should satisfy, which were efficiency, equity, and simplicity (24). And, third, based on the work of Cedric Sanford, McKerchar canvassed four macro-level policy objectives that a tax system should satisfy, which were equity, ability to pay, efficiency, and simplicity (27).
Evans, similar to McKerchar, canvassed macro-level policy objectives that a tax system should satisfy based on the work of Adam Smith (36-37), and concluded that all those macro-level policy objectives were effectively comprehended by the following three macro-level policy objectives that a tax system should satisfy: equity, efficiency, and simplicity ( 37).
[5] J E Meade and Others, The Structure and Reform of Direct Taxation (Meade Committee Report) (Chairman: J E Meade) (1978) 12.
[6] Ibid 12.
[7] Ibid 7.
[8] Ibid 16.
[9] Ibid 18.
[10] Ibid 21.
[11] R Woellner and Others, Australian Taxation Law 2001 (2001) 41.
[12] Sridaran, above n 1, 57-60.
[13] R A Musgrave and P B Musgrave, Public Finance Theory & Practice (1984) 232.
[14] W J Blum and H Kalven, ‘The Uneasy Case for Progressive Taxation’ (1952) 19(3) The Chicago Law Review 519.
[15] L Chipman, ‘The Very Idea of a Flat Tax’, CIS Policy Monograph. 2004, 66 accessible <http://www.cis.org.au> (8 December 2004).
[16] M Sridaran, ‘Some Arguments for not Having a Flat Personal Income Tax’ (2004) (48) CCH Tax Week 793.
[17] Chipman, above n 15, 18.
[18] Chipman, above n 15, 4.
[19] Chipman, above n 15, 4.
[20] Chipman, above n 15, 7.
[21] Chipman, above n 15, 8.
[22] Chipman, above n 15, 10.
[23] Chipman, above n 15, 12.
[24] Chipman, above n 15, 14.
[25] Chipman, above n 15, 15.
[26] Chipman, above n 15, 4-6.
[27] Sridaran, above n 16, 794.
[28] Sridaran, above n 16, 794.
[29] Sridaran, above n 16, 794; C O Galvin and B I Bittker, The Income Tax: How Progressive Should It Be (1974) 33.
[30] Ibid.
[31] Sridaran, above n 16, 794; Galvin and Bittker, above n 29, 42.
[32] Sridaran, above n 16, 794.
[33] Sridaran, above n 16, 794; Galvin and Bittker, above n 29, 34, 39.
[34] Sridaran, above n 16, 794; Galvin and Bittker, above n 29, 43.
[35] Sridaran, above n 16, 795; Galvin and Bittker, above n 29, 43-45.
[36] Sridaran, above n 16, 795; Galvin and Bittker, above n 29, 45-46.
[37] Sridaran, above n 16, 795; Galvin and Bittker, above n 29, 48-49.
[38] Sridaran, above n 16, 795; Galvin and Bittker, above n 29, 57.
[39] Sridaran, above n 16, 795.
[40] Sridaran, above n 16, 795.
[41] Sridaran, above, n 16, 795.
[42] Similar conflicting views have been expressed in other countries with respect to income taxation that obtains in those countries. For instance, in the context of income tax imposed in the USA and in Canada, see: Hamond M J, ‘The failings of the flat tax’, accessible at <http://www.ndol.org/print.cfm?contentid=2471> (10 December 2004); Hoover Institution, ‘The flat tax’, accessible at <http://www-hoover.stanford.edu?PRESSWEBSITE? FlatTax/chpt2.html> (10 December 2004); and E W Younkins, ‘Taxation and Justice’ accessible <http://www.quebecoislibre.org/000930-11.htm> (10 December 2004). The work of Blum and Kalven, above n 14, represents a most comprehensive (if somewhat dated) analysis of the pros and cons of a policy of progressive rates of income tax imposed on individuals as relevant to the USA. There (520) it is appositely concluded: ‘… in the end it is the implications about economic inequality which impart significance and permanence to the issue and institution of progression. Ultimately a serious interest in progression stems from the fact that a progressive tax is perhaps the cardinal instance of the democratic community struggling with its hardest problem.’
[43] R Krever and N Brooks, A Capital Gains Tax for New Zealand (1990) 44.
[44] Ibid 57-58.
[45] Ibid 45.
[46] Australia, Reform of the Australian Tax System: Draft White Paper (Draft White Paper) (1985) 77.
[47] L Murphy and T Nagel, The Myth of Ownership: Taxes and Justice (2002) 37.
[48] Australia, Review of Business Taxation: A Tax System Redesigned (Ralph Review Report) (Chairman: Ralph J) (1999) 599.
[49] Ibid 599.
[50] The concession of averaging was afforded by government in recognition of the seeming horizontal inequity that may arise due to a capital gain that has accrued over a number of years being taxed at progressive rates of income tax in one income year (in which that capital gain is realized): CCH Australia Limited, 1987 Australian Master Tax Guide (1987) 445.
[51] Review of Business Taxation, above n 48, 587.
[52] Sridaran, above n 1, 27.
[53] Musgrave and Musgrave, above n 13, 82.
[54] Meade, above n 5, 10.
[55] A M Okun, Equity and Efficiency: The Big Trade-Off (1975) 51.
[56] Meade, above n 5, 8.
[57] Meade, above n 5, 8.
[58] Meade, above n 5, 8.
[59] For an empirical finding that high marginal rates of income tax may not necessarily cause those deriving labour income to work less, see Break G F, ‘Income Taxes and Incentives to Work: An Empirical Study’ (1957) 47(5) The American Economic Review (September 1957) 529-549.
[60] Meade, above n 5, 8; Conversely, for empirical findings essentially to the effect that marginal rates of income tax may not have a significant influence on how taxpayers employ their capital, see J E Stiglitz ‘The Corporation Tax’ (1976) 5 Journal Of Public Economics 303-311; D F Bradford, ‘The Incidence and Allocation Effects of a Tax on Corporate Distributions’ (1981) 15 Journal Of Public Economics 1-22.
[61] Okun, above n 55, 61.
[62] Okun, above n 55, 61.
[63] Meade, above n 5, 8.
[64] Meade, above n 5, 8.
[65] Okun, above n 55, 51.
[66] Okun, above n 55,23.
[67] Okun, above n 55, 24-26.
[68] M Friedman, Capitalism and Freedom (1962) 158.
[69] Okun, above n 55, 36.
[70] Okun, above n 55, 38.
[71] Okun, above n 55, 40.
[72] Above, note 55, p 51.
[73] See J Gray, False Dawn: The Delusions of Global Capitalism (1998) 1-21 for a perceptive, thorough and persuasive analysis as to why a ‘free-market economic system’ is not as ‘free’ as many claim it is. The following passage from there sums up that analysis: ‘Free market governments model their policies on the era of laissez-faire–the mid-nineteenth century period [in the UK] in which government claimed that it did not intervene in economic life. In reality a laissez-faire economy – that is to say, an economy in which markets are deregulated and put beyond the possibility of political and social control–cannot be reinvented. Even in its heyday it was a misnomer. It was created by state coercion, and depended on every point in its workings on the power of government. By the First World War the free market had ceased to exist in its most extreme form because it did not meet human needs – including the need for personal freedom’ (5).
[74] Okun, above n 55, 36.
[75] Okun, above n 55, 36.
[76] Okun, above n 55, 40.
[77] Okun, above n 55, 40.
[78] Okun, above n 55, 43.
[79] Okun, above n 55, 44.
[80] Okun, above n 55, 46.
[81] In note 56 in my earlier work (cited in note 1 above), a number of works (by respectively R Ball, J Q Wilson, L Chipman, and E H Nell) is cited that canvass the pros and cons of a free-market economic system as a means for accomplishing economic efficiency.
[82] In note 61 in my earlier work (cited in note 1 above), a work (by Stilwell F) is cited that articulates an analysis as to why an ‘equal’ distribution of a country’s scarce resources may never cause a too severe impairment of economic efficiency. In note 62 in my earlier work (cited in note 1 above), a work (by Stein H) is cited that discusses why (in terms articulated by Henry Simons) a country’s government should intervene to reallocate that country’s scarce resources (otherwise allocated through unfettered operation of market forces) amongst that country’s public.
[83] Krever and Brooks, above n 43, 63.
[84] Krever and Brooks, above n 43, 63.
[85] Krever and Brooks, above n 43, 72.
[86] Krever and Brooks, above n 43, 73.
[87] Krever and Brooks, above n 43, 73.
[88] Krever and Brooks, above n 43, 73.
[89] Krever and Brooks, above n 43, 74.
[90] Krever and Brooks, above n 43, 74.
[91] Krever and Brooks, above n 43, 74.
[92] Reform of the Australian Tax System, above n 46, 77.
[93] Sridaran, above, n 1, 76.
[94] Krever and Brooks, above n 43, 8.
[95] Krever and Brooks, above n 43, 40.
[96] See generally H Grubert, ‘Source Rules, Trade and Income Taxes, and Electronic Commerce: Designing Rules for the Taxation of Cross-Border Income’ (2003) 33(2) Economic Analysis & Policy 237; P Burn, ‘How Highly Taxed Are We?: The Level and Composition of Taxation in Australia and the OECD’ CIS Policy Monograph, 2004, 67 accessible <http://www.cis.org.au> (28 December 2004).
[97] Reform of the Australian Tax System, above n 46, 78.
[98] Reform of the Australian Tax System, above n 43, 70.
[99] Reform of the Australian Tax System, above n 43, 70.
[100] Taxation Ruling, TR 2001/12 (2001) para 5.
[101] The position promulgated by the Commissioner has, however, been the subject of authoritative criticism. For instance, see I Gzell, ‘International Tax: Current Issues’ (2001) 4(3) The Tax Specialist, 114. There, essentially, it is argued that the Commissioner’s position that the types of taxes to which double tax avoidance treaties concluded by Australia before the enactment of the CGT regime were explicitly made applicable did not encompass a tax (even if it is nominally described as an income tax, as the CGT is) on capital gains is not tenable. That is so, it is argued there, as the CGT is, through its introduction to the 1936 Act and subsequently the 1997 Act, indisputably comprehended by income tax. Arguments consistent with those of Gzell (described just above) are found in R I Hamilton, R L Deutsche and J C Raneri, Guidebook to Australian International Taxation (2001) 6-33-6-36.
[102] Taxation Ruling, above n 100, para 5.
[103] Taxation Ruling, above n 100, para 5.
[104] In 2004, Chris Evans published a work (C Evans, Taxing Personal Capital Gains: Operating Cost Implications (Research Study No 40, Australian Tax Research Foundation, Sydney, 2003) (cited in note 4), which addressed the question of whether the manner in which capital gains are taxed influence the operating costs of the CGT regime. That work was reviewed as part of the research undertaken for this paper. But that work is not considered to be of relevance to the issue of whether, in the enactment of the CGT regime, the satisfaction of the macro-level policy objective of simplicity warranted a significant compromise of the perception (of the government of the day) that the CGT regime (upon enactment) will satisfy the macro-level policy objective of horizontal equity. That is so as that work is not an empirical study that canvasses the motivations that underlay the enactment of the CGT regime.
[105] Krever and Brooks, above n 43, 138.
[106] Krever and Brooks, above n 43, 138.
[107] Krever and Brooks, above n 43, 138.
[108] Krever and Brooks, above n 43, 138.
[109] Aust, Taxation Reform Committee Full Report (Asprey Committee Report) (Chairman: Asprey K W) (1975) 414.
[110] W D Andrews, ‘The Achilles Heel of the Comprehensive Income Tax’ in C E Walker and M A Bloomfield eds, New Directions in Federal Tax Policy for the 1980s (1983); A J Auerbach, ‘Retrospective Capital Gains Taxation’ (Working Paper 2792, National Bureau Of Economic Research, Cambridge, Massachusetts 1988) accessible <http://papers.nber.org/papers/ w2792.pdf> (27 December 2004); A J Auerbach, ‘Capital Gains Taxation and Tax Reform’ (1989) 42(3) National Tax Journal 391; R Brinner, ‘Inflation, Deferral and the Neutral Taxation of Capital Gains’ (1973) 26(4) National Tax Journal 565; M W Bucovetsky, ‘Inflation and the Personal Tax Base: The Capital Gains Issue’ (1977) 25 Canadian Tax Journal 79; and D J Shakow, ‘Taxation without Realization: A Proposal for Accrual Taxation’ (1986) 134 University of Pennsylvania Law Review 1111. A comprehensive analysis as to why taxing capital gains as they accrue (‘accruals basis’) is to be preferred over taxing capital gains as they realize is given in the source cited in note 43 (131-150). There, it is argued as follows: The accruals basis better satisfies horizontal equity (as, under the accruals basis, a taxpayer who has realised a capital gain and a taxpayer who has an accrued but unrealised capital gain of equal value, are both taxed similarly) (137). The accruals basis better satisfies economic efficiency (as, under the accruals basis, there is no possibility that a ‘lock-in’ effect will arise) (138). The accruals basis better satisfies simplicity (as, under the accruals basis, the scope for postponement of tax payments through a contrived deferral of the realization of a capital gain is absent) (139). The argument that, under the accruals basis, a taxpayer’s liquidity is burdened as the tax on capital gains has to be paid before those gains are realized in liquid form is overstated (141).
[111] Krever and Brooks, above n 43, 132.
[112] Krever and Brooks, above n 43, 105.
[113] Krever and Brooks, above n 43, 105.
[114] Krever and Brooks, above n 5, 21.
[115] Krever and Brooks, above n 5, 39.
[116] Meade, above n 5, 39.
[117] Income Tax Assessment Act 1997 (Cth) s 104-230.
[118] Income Tax Assessment Act 1997 (Cth) s 104-230(2).
[119] Income Tax Assessment Act 1997 (Cth) s 104-230(7).
[120] Income Tax Assessment Act 1997 (Cth) s 149-30.
[121] Income Tax Assessment Act 1997 (Cth) s 149-50.
[122] Income Tax Assessment Act 1997 (Cth) s 104-230.
[123] C Evans, ‘CGT after Ralph – The New Regime’ (paper presented at the Taxation Institute of Australia Conference, Western Australia, January 2000) 6.
[124] Musgrave and Musgrave, above n 13, 93.
[125] Musgrave and Musgrave, above n 13, 93.
[126] Krever and Brooks, above n 43, 93.
[127] Krever and Brooks, above n 43, 98.
[128] Meade, above n 5, 98.
[129] R Stokes, ‘Taxing Family Homes: An Autopsy of the Premium Property Tax in New South Wales’ (paper presented at the Australasian Tax Teachers’ Association 17th Annual Conference in Wellington, 26-28 January 2005) 8.
[130] Woellner, above n 11, 41.
[131] C Evans, ‘The Australian Capital Gains Tax: Rationale, Review and Reform’ (1998) 14(3) Australian Tax Forum 306.
[132] Ibid 306.
[133] Reform of the Australian Tax System, above n 46, 85.
[134] Evans, above n 131, 306.
[135] Evans, above n 131, 306.
[136] Evans, above n 131, 306.
[137] Evans, above n 131, 306.
[138] Evans, above n 131, 307.
[139] Review of Business Taxation, above n 48, vii.
[140] Sridaran, above n 1, 41.
[141] Chapter 5 of my draft doctoral thesis, a thesis which is entitled ‘A Study on Whether the Australian Regime of Income Tax on Capital Gains causes Widespread Violation of Horizontal Equity’.
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