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A publication of The Fraser Institute
STUDIES IN
&ENTREPRENEURSHIPMARKETS
Number 4 / February 2007
The Economic Costs of Capital Gains TaxesNiels Veldhuis, Keith Godin, and Jason Clemens
Contents
Executivesummary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1 Definingcapitalgainstaxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2 Governmentrevenuefromcapitalgainstaxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3 Economiccostsofcapitalgainstaxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
4 Recommendation—eliminatecapitalgainstaxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Abouttheauthors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
StudiesinEntrepreneurshipandMarkets are published periodically throughout the year by The Fraser Institute, Vancouver, British Columbia, Canada.
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Editing, design and typesetting: Kristin McCahon and Lindsey Thomas Martin
Printed and bound in Canada ISSN 1718-0724 Studies in Entrepreneurship and Markets (print) ISSN 1718-0732 Studies in Entrepreneurship and Markets (online)
Date of issue: February 2007
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The Fraser Institute / Studies in Entrepreneurship and Markets 4
The Economic Costs of Capital Gains Taxes / �
Executive summary
Capitalgainstaxes,likeallformsoftaxation,raiserevenuesforthegovernmentbutalsoimpose
economiccosts .Unfortunately,thecostofcapitalgainstaxesisnotlimitedtotheamountof
taxcollected .Capitalgainstaxesimposeadditionalcostsontheeconomybecausetheyreduce
returnsoninvestmentand,thereby,causeindividualsandbusinessestoaltertheirbehaviour .
Asaresult,capitalgainstaxeshaveasubstantialimpactonthereallocationofcapital,thestock
ofcapital,andthelevelofentrepreneurshipinCanada .
Reallocation of capital
Capitalgainstaxessignificantlyimpedethereallocationofcapitalfromolder,lessprofitable,
investmentstothosewithhigherratesofreturn .Numerousacademicstudieshavefoundthat
investorsdoindeedlockintheircapitalinthepresenceofcapitalgainstaxesandthatthe“lock-in
effect”significantlyimpedeseconomicgrowth .Withouttheefficientflowofcapital,thedevel-
opmentofnew,potentiallyprofitable,businessesislimited .Giventhatthesenewventuresare
theenginesofproductivity,employment,andwealth-creation,capitalgainstaxesreducethe
economicwell-beingofallCanadians .
Stock of capital
CapitalgainstaxeshaveasignificantimpactonthestockofcapitalinCanadabyincreasingthe
costofcapitaltoCanadianbusinesses .Capitalgainstaxesmakecapitalinvestmentsmoreexpen-
siveandthuslessinvestmenttakesplace .Areducedamountofcapitalhasanumberofnega-
tiveconsequencesincludingdecreasesintheproductivityofCanadianworkersand,ultimately,
lowerCanadianlivingstandards .
Entrepreneurship and risk-taking
Capitalgainstaxeshaveadetrimentalimpactonthenumberofentrepreneursandrisk-takersin
Canada .Entrepreneursandtheirfinanciersarecriticaltoasuccessfuleconomyinthattheychal-
lengethestatusquo,advancetechnology,developnewproductsandservices,createjobs,and
increasewealth .Theseindividualstrade-offlowcurrentcompensationbecausetheyexpectto
generatesignificantfuturereturns .Capitalgainstaxesreducethereturnthatentrepreneurs,ven-
turecapitalists,andotherinvestorsreceivefromrisk-taking,innovation,andworkeffort .Lower
expectedreturnsdecreasesthenumberofentrepreneursandrisk-takersandultimatelyreduces
investment,technologicaladvances,employment,andoveralleconomicgrowth .
The Fraser Institute / Studies in Entrepreneurship and Markets 4
4 / The Economic Costs of Capital Gains Taxes
Compliance costs, administrative costs and tax evasion
Inadditiontothedamagingeconomiccostsofcapitalgainstaxesresultingfromchangesinthe
incentivesfacedbyindividualsandbusinesses,capitalgainstaxesalsoimposecomplianceand
administrativecosts .Compliancecostsareincurredbyindividualsandbusinesseswhentheyful-
filltherecordingandfilingrequirementsassociatedwithpayingatax .Administrativecostsare
expensesincurredbygovernment—andultimatelypaidforbycitizens—tomanageandmain-
tainthetax-collectionsystem .Finally,therearealsocostsarisingfromtheevasionofcapitalgains
taxes:theresourcesspentinevadingthetaxcouldbeputtomoreproductiveuses .
Marginal efficiency cost (MEC) of capital gains taxes
Estimatesofthemarginalefficiencycost(MEC)ofbothAmericanandCanadiantaxesindicate
thatpersonalcapitalincometaxes(dividends,capitalgains,andinterestincome)imposesub-
stantialcostsontheeconomy .RecentestimatesfromthefederalDepartmentofFinanceshow
thata$1reductioninpersonalcapitalincometaxes(dividends,capitalgains,andinterestincome)
increasessociety’swell-beingby$1 .30 .Inaddition,thesetaxeswereshowntobemuchmore
costlythanothertypesoftaxessuchasconsumptionandpayrolltaxes .Asaresult,thereareeco-
nomicgainsavailabletoCanadiansfromshiftingawayfrompersonalcapitalincometaxes .
Recommendation—eliminate capital gains taxes
Giventherelativeefficiencyofothertypesoftaxes,Canadiangovernments,bothfederaland
provincial,shouldeliminatecapitalgainstaxes .Therevenuelossfromsuchamovewouldbe
smallgiventhatcapitalgainstaxesaccountedforlessthanonepercent(0 .8%)oftotalfederal
andprovincialgovernmentrevenuein2005/06 .Iflostrevenuesmustbereplaced,other,less
costly,formsoftaxationshouldbeused .
EliminatingcapitalgainstaxeswouldsubstantiallyincreaseprosperityinCanada .Inthe
wordsofformerFederalReserveChairmanAlanGreenspan,“[t]hemajorimpact[ofthecapital
gainstax]istoimpedeentrepreneurialactivityandcapitalformation .Whilealltaxesimpede
economicgrowthtooneextentoranother,thecapitalgainstaxisatthefarendofthescale .I
arguedthattheappropriatecapitalgainstaxwaszero .”
The Fraser Institute / Studies in Entrepreneurship and Markets 4
The Economic Costs of Capital Gains Taxes / �
Introduction
Capitalgainstaxes,likeallformsoftaxation,raiserevenuesforthegovernmentbutalsoimpose
economiccosts .Unfortunately,thecostoftaxationisnotlimitedtotheamountoftaxcollected .
Capitalgainstaxesimposeadditionalcostsontheeconomybecauseindividualsandbusinesses
altertheirbehaviourinresponsetothesetaxes .[1]Thepurposeofthisstudyistoexaminethe
economiccostsofcapitalgainstaxes[2]andtoproviderecommendationsthatwillmaximize
investment,workeffort,risk-taking,andentrepreneurshipinCanada .
Organization of the study
Section 1 definescapitalgainstaxesandprovidesinformationontheapplicableratesofcapital
gainstaxatthefederalandprovinciallevelsinCanada .Italsoprovidesacomparisonofinterna-
tionalratesforthecapitalgainstax .
Section 2 presentsinformationaboutgovernmentrevenuesgeneratedbycapitalgainstaxesat
boththefederalandprovinciallevelsofgovernmentinCanada .
Section 3 examinestheeconomicimpactofcapitalgainstaxesonthereallocationofcapital,
thestockofcapital,andthelevelofentrepreneurship .Italsoexaminesthecomplianceand
administrativecostsassociatedwithcapitalgainstaxesandconcludesbyshowinghowmuch
morecostlyitistoraiserevenueusingcapital-basedtaxeslikecapitalgainstaxesratherthan
othertypesoftaxes .
Section 4 providesrecommendationsthatwillmaximizeinvestment,workeffort,risk-taking,
andentrepreneurship .
1 Alltaxesoncapitalfromindividualdividend-andinterest-incometaxestocorporatecapitaltaxes,salestaxes on business inputs, and corporate income taxes reduce the returns on investment . Froman eco-nomicpointofview,therearelargeefficiencygainstobeachievedbymovingawayfromtaxesoncapitaltowardstaxesonconsumption(seeClemensetal .,2007) .
2 Itisimportanttonotethatthereareconsiderationsotherthaneconomiccostsindeterminingtaxpolicy .Forinstance,equity(oftenreferredtoasfairness)andsimplicityarecritical .However,thisstudyfocusesontheeconomiccosts,whicharealltoooftenignored .
The Fraser Institute / Studies in Entrepreneurship and Markets 4
� / The Economic Costs of Capital Gains Taxes
1 Defining capital gains taxes
A capital gain (or loss) generally refers to the price of an asset when it is sold compared to its
purchase price. A capital gain occurs if the value of the asset at the time of sale is greater than
the original purchase price. [3] On the other hand, a capital loss occurs if the value of the asset
at the time of sale is less than the original purchase price. [4]
Canada does not maintain a separate and distinct capital gains tax as capital gains
are considered normal income and subject to income taxes. [5] Depending on who holds the
asset (individual or business), capital gains are taxed at either personal or corporate income-
tax rates. However, capital gains are provided a preferential tax rate through what is referred
to as an inclusion rate, the portion of a capital gain that is subject to income tax. [6] The inclu-
sion rate in Canada is currently 50%, which means that only half of capital gains are subject to
income taxes. [7]
Because Canada has a progressive personal income-tax system (tax rates increase as
income increases), the most important rate is the taxpayer’s marginal tax rate—the rate that
must be paid on the next dollar of income. [8] Table 1 shows for 2006 (1) federal and provincial
top marginal rates for personal income tax and the thresholds at which they apply; (2) federal
and provincial top marginal rates for capital gains tax; (3) in the last column, the combined fed-
eral-provincial top marginal rates for capital gains tax. Since 50% of capital gains are included as
taxable income, the marginal tax rate for a capital gain is half the applicable income-tax rate.
While Canadians in all provinces face the same federal top personal tax rate on capital
gains (14.5%), provincial rates vary greatly. Alberta had the lowest provincial top marginal capital-
gains tax rate in Canada at 5.0% (2006). [9] Newfoundland and Labrador, on the other hand, had
the highest top provincial marginal capital-gains tax rate at 9.8% (2006).
The level of income at which the top provincial income-tax rate applies also differs greatly
among the provinces. For instance, Quebec had the lowest threshold at which the top rate applied
($57,431) while New Brunswick ($108,769) and Saskatchewan ($107,368) had the highest thresholds.
3 This is typically called a capital gain realization.
4 In most countries, including Canada, taxpayers are able to offset capital gains with capital losses to reduce the capital gains tax paid. In Canada, taxpayers who have a capital loss in one year can use it to reduce any capital gains in the year, to a balance of zero. If capital losses are more than the taxpayer’s capital gains, he has a net capital loss for the year. Taxpayers are able to apply their net capital losses to taxable capital gains of the three preceding years and to taxable capital gains of future years. For more information, see <http://www.cra-arc.gc.ca/E/pub/tg/t4037/t4037-06e.pdf>.
5 There is debate in the literature about whether or not capital gains are normal income (see Bartlett, 2001).
6 The inclusion rate also determines allowable capital losses. Taxpayers multiply their capital loss for the year by 0.5 to determine their allowable capital loss.
7 See Lochan (2002) for an explanation of the rationale for the inclusion rate. The inclusion rate has changed over time (see Sandler, 2004 and Richardson and Moore, 1995).
8 Grubel (2000) found that, in Canada, most capital gains are taxed at the top marginal personal income-tax rate.
9 Alberta is the only province with a single personal income-tax rate, which applies to all levels of income.
The Fraser Institute / Studies in Entrepreneurship and Markets 4
The Economic Costs of Capital Gains Taxes / �
Inotherwords,Quebec’srelativelyhightopmarginaltaxrateoncapitalgainsappliesatnearly
halfthelevelofincomeasthatinNewBrunswickorSaskatchewan .Albertaistheonlyprovince
thathasasinglepersonalincome-taxrate,whichappliestoalllevelsofincome .
Figure1showsthecombinedfederal-provincialtopmarginalpersonalcapital-gainstax
ratesinCanadaforeachprovincein2006 .Thethreewesternprovinceshadthelowestcom-
bined(federal-provincial)topmarginalcapital-gainstaxratesin2006 .Specifically,Albertahad
thelowestfederal-provincialtopmarginalcapital-gainstaxrateinCanadaat19 .5%(2006),fol-
lowedbyBritishColumbia(21 .9%)andSaskatchewan(22 .0%) .[10]NewfoundlandandLabrador,
ontheotherhand,hadthehighestcombined(federal-provincial)topmarginalcapital-gains
taxrateat24 .3% .
International capital gains taxes
Thestructureandratesofcapitalgainstaxesvaryconsiderablybycountry .Somecountrieshave
aseparateanddistincttaxoncapitalgainswhileothers,likeCanada,taxcapitalgainsthrough
theirincome-taxsystems .Inaddition,boththeratesoftaxandlevelsofincomeatwhichthose
ratesapplydifferamongcountries .
10 Thecombinedfederal-provincialratesapplytoincomeabove$118,286(thetopfederalthreshold)asthetopfederalthresholdishigherthanallofthetopprovincialthresholds .
Table 1: Top marginal rates and thresholds for personal income tax
and top marginal rates for capital gains tax, 2006
Personal income tax Capital gains tax
Top marginal rate [a]
Threshold for top marginal rate
Top marginal rate
Combined federal-provincial top marginal rate [d]
Federal 29 .0% $118,286 14 .5% —
British Columbia 14 .7% $94,122 7 .4% 21 .9%
Alberta 10 .0% N/A[b] 5 .0% 19 .5%
Saskatchewan 15 .0% $107,368 7 .5% 22 .0%
Manitoba 17 .4% $65,001 8 .7% 23 .2%
Ontario 17 .4% $69,518 8 .7% 23 .2%
Quebec [c] 19 .2% $57,431 9 .6% 24 .1%
New Brunswick 17 .8% $108,769 8 .9% 23 .4%
Nova Scotia 19 .3% $93,001 9 .6% 24 .1%
Prince Edward Island 18 .4% $61,510 9 .2% 23 .7%
Newfoundland & Labrador 19 .6% $59,181 9 .8% 24 .3%
[a]Ratesincludeallsurtaxes .[b]Albertahasasingle10%incometaxforallpersonalincome;therefore,thethresholdforthetopratedoesnotappply .[c]Quebec’sratesareadjustedforabatements .[d]Thecombinedfederal-provincialratesapplyatincomeabove$118,286asthisamount,thetopfederalthreshold,ishigherthanalloftheprovincialthresholds .Source: CanadaRevenueAgency,2006;calculationsbyauthors
The Fraser Institute / Studies in Entrepreneurship and Markets 4
� / The Economic Costs of Capital Gains Taxes
Figure2showsthetoppersonalcapital-gainstaxratesin2005for30countriesbelong-
ingtotheOrganisationofEconomicCo-operationandDevelopment(OECD) .[11]Elevenofthese
countriesdonotlevypersonalcapitalgainstaxes .Canadahastheninthhighestpersonalcapital-
gainstaxrateamongcountriesat23 .2% .[12]TheUnitedStatesranks21stwithacapitalgainstax
rateof20 .3% .[13]Denmarkhasthehighestcapital-gainstaxrateof43 .0% .
AsinthediscussionofCanadianprovinces, it is importanttonotethatcapital-gains
taxratespresentedinfigure2applyatdifferentlevelsofincomeindifferentcountries .Thatis,
whilethetaxratescouldbeidenticalintwocountries,thelevelofincomeatwhichthoserates
applycouldbemarkedlydifferent .Unfortunately,nointernationalcomparisonofthresholdsfor
capitalgainstaxesexists .
11 Theratespresentedarelong-termratesofcapitalgainstax .Long-termratesofcapitalgainstaxareratesthatapplytoassetsheldforatleasttenyears .Itshouldbenotedthatsomecountrieshavedif-ferentratesofcapitalgainstaxdependingonthelengthoftimeanassetisheld(holdingperiod) .Forexample,intheUnitedStates,federalcapital-gainstaxonassetsheldlessthanoneyeararesubjecttotheindividual’stopapplicabletaxrate .Iftheassetisheldmorethanoneyear,thenafederaltaxrateof15 .0%applies(5 .0%tothoseinthelowesttwoincome-taxbrackets) .Similarly,DenmarkandtheUnitedKingdomhavehighershort-termratesoftaxoncapitalgains(definedasassetsheldmorethanoneyearbutlessthantwoyearsinthestudy)of62 .9%and40 .0%,respectively .SeeErnst&Young(2004)foradetaileddelineationofinternationalratesofpersonalcapital-gainstaxandtheholdingperiodsforwhichtheyapply .
12 ThisrateisbasedontherepresentativeprovinceofOntario .Thenationalaverageofthetenprovincialtopmarginalratesoftaxoncapitalgainsforthe2005taxyearis22 .9% .
13 Includesfederal,state,andcitytaxes .StateandcitytaxesarebasedonratesinMichiganandDetroit .TheUSfederalrateoncapitalgainsis15 .0% .
The Fraser Institute / Studies in Entrepreneurship and Markets 4
The Economic Costs of Capital Gains Taxes / �
The Fraser Institute / Studies in Entrepreneurship and Markets 4
10 / The Economic Costs of Capital Gains Taxes
Conclusion
Capitalgainsandlossesoccurifthevalueoftheassetatthetimeofsalediffersfromtheoriginal
purchaseprice .InCanada,50%ofcapitalgainsaresubjecttotaxes .Capitalgainstaxesvarycon-
siderablyamongtheprovinceswiththethreewesternprovinceshavingthelowestcombined
(federal-provincial)capital-gainstaxrateswhileQuebec,NovaScotia,andNewfoundlandand
Labradorhavethehighestrates .Canadahasarelativelyhighcapital-gainstaxratecompared
toothercountries .
The Fraser Institute / Studies in Entrepreneurship and Markets 4
The Economic Costs of Capital Gains Taxes / 11
2 Government revenue from capital gains taxes
Thissectionpresentsinformationontheamountofrevenueraisedthroughcapitalgainstaxes
byCanadiangovernments,bothfederalandprovincial .Unfortunately,theamountofrevenue
raisedthroughcapitalgainstaxesisnotprovidedtothepublicingovernmentpublications .
Canadiangovernmentslumpcapital-gainstaxrevenueswithinthelargerpersonalandcorpo-
rateincome-taxcategoriesintheirbudgetsandannualreports .Theinformationpresentedin
thissectionisbasedonaspecialdatarequestfromthefederalDepartmentofFinance .
In2005/06,Canadiangovernmentsraisedapproximately$3 .5billionthroughcapital
gainstaxesintotal .Thefederalgovernmentraised$2 .2billionwhiletheprovincescollecteda
combined$1 .3billion .[14]Figure3showsthepercentageoffederalandprovincialgovernment
revenuecollectedthroughvarioustypesoftaxes .In2005/06,totalconsolidatedfederaland
provincialgovernmentrevenuewas$443 .1billionofwhich37 .2%wascollectedthroughper-
sonalincometaxesand11 .1%wascollectedthroughcorporateincometaxes .[15]Incomparison,
capitalgainstaxesaccountedforlessthanonepercent(0 .8%)oftotalfederalandprovincial
governmentrevenue .Inotherwords,revenuescollectedintheformofcapitalgainstaxesare
verysmallcomparedtothemainsourcesofgovernmentrevenue—personalandcorporate
incometaxesandsalestaxes .
14 Theprovincialportionofcapital-gainstaxrevenuewasestimatedbyapplyingtheratiobetweenfederalcapital-gainstaxrevenueandtotalfederalincometaxcollectedtoprovincialincome-taxrevenue .
15 Personalandcorporateincometaxesareadjustedforcapital-gainstaxrevenue .
The Fraser Institute / Studies in Entrepreneurship and Markets 4
12 / The Economic Costs of Capital Gains Taxes
3 Economic costs of capital gains taxes
This section examines the economic impact of capital gains taxes on the reallocation of capi-
tal, the stock of capital, and the level of entrepreneurship. It also examines the compliance and
administrative costs associated with capital gains taxes and concludes by showing how much
more costly it is to raise revenue using capital-based taxes like capital gains taxes rather than
other types of taxes.
1 The reallocation of capital and the “lock-in effect”
One of the most significant economic effects of capital gains taxes is the incentive it creates for
owners of capital to hold on to their current investments, even if more profitable and produc-
tive investment opportunities are available. Economists refer to this result as the “lock-in” effect.
Capital that is locked into current investments and not reallocated to more profitable opportuni-
ties reduces economic performance. Consider an investor who wishes to sell an asset and rein-
vest the proceeds in a new project. The amount of money received from the sale of the asset is
reduced by the capital gains tax. In order for the investor to reallocate his capital, the new invest-
ment project must provide a rate of return high enough to recoup the funds paid in taxes plus
yield a reasonable rate of return.
Suppose an investment currently worth $1,500 yields an annual rate of return of 7.0%
per year. Over five years, this investment will grow to $2,103.83 if all income is reinvested and no
taxes are paid on the income generated. Now suppose that, if the $1,500 asset were sold today,
the owner would receive a $500 capital gain (the original cost of the investment was $1000). If
the owner resides in Ontario and is currently in the highest income-tax bracket, he would face
a 23.2% capital-gains tax rate (see figure 1) resulting in $116.00 in capital gains taxes. After the
sale of the asset and payment of the tax, the investor has $1,384.00 to place in a new investment.
For an investment of $1384.00 to grow to $2103.83 (the amount received after five years from the
original investment), a return close to 9.0% annually must be achieved. An investor with a time
horizon of five years will hold on to the original investment (will lock in the investment) yielding
7.0% per year unless a new investment yields at least 9.0%. [16] In other words, in our example,
an investment project yielding between slightly more than 7% and 9% is not funded.
While the magnitude of the lock-in effect depends on numerous factors (the rate of
return on the original and new investments and investor’s time horizon), economic costs result
16 In 2002, Professors Sarath Abeysekera and Earl Rosenbloom of the University of Manitoba wrote an article in the Canadian Tax Journal titled “The Capital Gains Lock-in Effect: Deciding Whether to Hold or Switch.” The authors present formulas for determining the break-even rate of return for investments subject to capital gains taxation. This is the rate of return at which an investor is indifferent when deciding whether to hold a given investment asset or to switch to an alternative investment asset with capital gains taxation. Depending on a given rate of capital gains taxation, holding period, and expected capital growth rates, readers can use the tables provided and calculate their break-even rate of return. The tables illustrate the lock-in effect through the practical decisions investors must make in the presence of capital-gains taxa-tion. The tables are available on line in an interactive version at <http://www.umanitoba.ca/asper/faculty/sarath.abeysekera/research.htm>.
The Fraser Institute / Studies in Entrepreneurship and Markets 4
The Economic Costs of Capital Gains Taxes / 1�
becausecapitalgainstaxespreventthereallocationofcapitalfromlowertohigheryielding
uses .Thatis,capitalgainstaxescausetheeconomytolosetheextraoutputthatthereallo-
cationofcapitalwouldhaveproduced .Thelock-inofcapitalpreventsthedevelopmentof
somenew,potentiallyprofitable,businessesthatareenginesofproductivity,employment,
andwealthcreation .
Numerousacademicstudieshaveinvestigatedthelock-ineffect .[17]Forexample,an
influentialpaperbyHarvardProfessorMartinFeldsteinandhiscolleaguesJoelSlemrodand
ShlomoYitzhaki(1980)wasoneofthefirsttoprovideanempiricalanalysisoftheeffectoftaxa-
tionontherealizationofcapitalgains(saleofcorporatestocksataprofit) .[18]Theauthorsfound
thattherealizingofcapitalgainsisverysensitivetothemarginaltaxrate .Theyfoundasignificant
lock-ineffect:a10 .0percentage-pointincreaseinthemarginaltaxratereducedtheprobability
ofsellingastockby6 .5percentagepoints .[19][20]
PaulBolster,LawrenceLindsey,andAndrewMitrusi(1989)evaluatedtheimpactofthe
eliminationin1986ofthelower,long-termtaxrateoncapitalgainsonstockmarketactivityin
theUnitedStates .[21]TheauthorsexaminedtradingvolumeontheNewYorkStockExchange
(NYSE)andtheAmericanStockandOptionsExchange(AMEX)from1976to1987 .Theyfoundthat
tradingvolumesignificantlyincreasedinthemonthsleadinguptothetaxchangeandthattrad-
ingvolumesignificantlydeclinedafterthetaxchange:tradingvolumewas15 .0%lowerinthe
Januaryof1987comparedtopreviousJanuaries .Theempiricalresultssuggestthattheexpected
increaseinthecapital-gainstaxrateinducedinvestorstoreallocatecapitalpriortothechange .
AmorerecentstudybyPeterKuglerandCarlosLenz(2001)examinedtheimpactofthe
lock-ineffectontheoveralleconomybystudyingtheeffectofcapitalgainstaxesindifferent
jurisdictionswithverysimilareconomicconditionsandtaxsystems .Theauthorsexaminedthe
17 Manystudiesprovideempiricalevidenceoftheexistenceofalock-ineffect .Forinstance,Jog(1995)findsevidenceofalock-ineffectinCanadabyexaminingthechangeincapitalgainsrealizationsafterthe1985introductionofacapitalgainsexemption .Also,seeLandsmanandShackelford,1995,Shackelford,2000,Blouinetal .,2000,andDaietal .,2006forempiricalevidenceofthelock-ineffect .
18 AnearlierstudybyMartinFeldsteinandShlomoYitzhaki(1978)examinedtherelationshipbetweencapitalgainstaxesandstock-marketactivitybutdidnotextendtheanalysistocapitalgainsrealizations .
19 Inanearlierstudy,Yitzhaki(1979)estimatesthathigh-incomeinvestorssacrificeanannualreturnofap-proximately1 .5%ofthevalueoftheirstockasaresultofthelock-ineffect .
20 Itisimportanttonotethedifferencebetweenapercentage-pointchangeandapercentchange .If,forex-ample,thecurrentcapitalgainstaxratewereincreasedfrom30%to35%,thechangecouldbeinterpretedasa5percentage-pointincreaseora16 .7%increase[(35−30)/30×100] .
21 AnearlierstudybyLindsey(1987)simulatesthebehaviouralresponseofinvestorstotheUSTaxReformActof1986(whichincreasedtheaveragetaxrateoncapitalgainsfrom15 .0%to27 .0%) .Theauthorestimatesthatthefirst6 .0percentage-pointincreasewouldreducecapitalgainsby30 .0%whilethesecond6 .0per-centage-pointincreasewouldreducecapitalgainsbyatotalof50 .0% .Lindseyconcludesthat,atleastintheshort-term,thisevidencesupportsthelock-ineffect .AstudybyDonaldKiefer(1990)usesacomputersimulationtotesttheimpactonstock-marketactivityofthereintroductionofalower,long-termrateofcapitalgainstax .Usingthe1989proposaltoreducetaxonlong-termcapitalgainsfrom28 .0%to15 .0%,heestimatesthattheaverageholdingperiodofinvestorswouldincreasefrom2 .24yearsto2 .81years .Thisisconsistentwithotherstudiesthatconcludeinvestorslock-intheircapitaltoqualifyforthelower,long-termrateoftax .Inaddition,therateatwhichinvestorswouldsellandrepurchasestocksyear-over-year(theturnoverrate)wouldincreasefrom19 .7%to22 .9% .Putdifferently,reducingcapitalgainstaxesencour-agesinvestorstounlockcapitalgainsandincreasestheflowofcapital .
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experienceofregionalgovernments(“cantons”)inSwitzerlandthateliminatedthecapitalgains
tax .Theauthors’statisticalanalysisshowedthattheeliminationofcapitalgainstaxeshada
positiveandeconomicallysignificanteffectonthelong-termlevelofrealincomein7ofthe8
cantonsstudied .Specifically,theincreaseinthelong-termlevelofrealincomerangedbetween
1 .1%and3 .0%;thismeansthatthesizeoftheeconomywas1%to3%largerduetotheelimina-
tionofcapitalgainstaxes .
Whilemostresearchhasexaminedthelock-ineffectfromtheperspectiveoftheinvestor,
arecentpaperbyCharietal .(2005)arguedthatthelock-ineffectalsoexistedforentrepreneurs
andventurecapitalists .Theytoo,mayholdontotheirinvestmentstoolongbecauseofthe
inabilitytofindinvestmentsthatcompensatethemfortaxespaid .Thatis,entrepreneursstayin
projectslongerthanexpectedorisoptimalbecauseshiftingtonewprojectsistoocostly .The
authorsconcludedthatpotentiallymoreprofitableprojectsgounfundedbecauseentrepre-
neurslock-intheircapitalincurrentprojects .
Conclusion
Capitalgainstaxessignificantlyimpedethereallocationofcapitalfromolder,lessprofitable,
investmentstothosewithhigherratesofreturn .Numerousempiricalstudieshavefound
thatinvestorsdoindeedlockintheircapitalinthepresenceofcapitalgainstaxesandthat
thelock-ineffectdamagesaneconomy .Withouttheefficientflowofcapital,thedevelop-
mentofnew,potentiallyprofitable,businessesislimited .Giventhatthesenewventuresare
theenginesofproductivity,employment,andwealth-creation,capitalgainstaxesreduce
economicwell-being .
2 The “user cost of capital” and the stock of capital
Capitalgainstaxeshaveasignificantimpactonthestockofcapital .Areducedamountofcapital,
inturn,hasanumberofnegativeconsequencesincludingdecreasesintheproductivityofCana-
dianworkersand,ultimately,lowerCanadianlivingstandards .[22]Therelationshipbetween
capitalgainstaxesandthestockofcapitaldependsbothontheimpactofcapitalgainstaxes
onthecostofcapitaltousers(i .e .businesses)andhowsensitivetheseusersaretochangesin
thecostofcapital .
Capital gains taxes and the cost of capital
The“usercostofcapital”isthecosttoabusinessofraisingoneadditionaldollarforinvestment .
ThetermwasoriginallyintroducedbyHarvardeconomistDaleJorgenson(1963)torefertothe
totaleconomiccostofcapitalinvestmentincludingthemarketpriceofraisinganadditionalunit
ofcapital,interestcosts(ifcapitalispurchasedusingdebt),requiredrateofreturntoequityown-
ers(ifcapitalispurchaseusingretainedearningsormoneyraisedthroughshareofferings),and
thetaxesthatfirmsmustpayontheprofitthatthecapitalinvestmentgenerates .
22 SeeVeldhuisandClemens,2006foradetaileddiscussionoftheimpactofcapitalaccumulationonproduc-tivityandprosperity .
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InvestorshavemanyinvestmentopportunitiesinCanadaandinternationally .Toattract
investors,Canadianbusinessesmustpossessthehighestrisk-adjustedrateofreturnavailableto
investors .Capitalgainstaxesincreasetherateofreturnthatbusinessesmustgeneratefortheir
investorsbecauseinvestorsmustpaytaxonanygainsinthevalueoftheirshares .[23]Inother
words,capitalgainstaxesrequirefirmstoprovidehigherpre-taxratesofreturntotheirown-
ersbecausethereturnswillbeloweredwhenthecapitalgainstaxisapplied .Because,asnoted
above,therequiredrateofreturnthatinvestorsdemandispartofthetotaleconomiccostof
capital,capitalgainstaxesincreasethe“usercostofcapital .”
Numerousempiricalstudieshaveexaminedtheimpactofcapitalgainstaxesonfirms’
usercostofcapital .[24]Forinstance,McKenzieandThompson(1995)estimatethata10 .0percent-
age-pointreductionintherateofcapitalgainstaxesinCanadadecreasesthecostofcapitalby
3 .0%to6 .0% .[25]AllenSinai(1997)estimatedtheimpactupontheAmericaneconomyofhalv-
ingthecapitalgainstaxforindividuals(50%capitalgainsexclusion)andreducingtherateto
businessesfrom35 .0%to25 .0% .Hefoundthatthecapital-gainstaxreductionwouldreducethe
costofcapitaltobusinesses,onaverage,by2 .7%peryearfrom1997to2002 .Similarly,astudy
byDRI/McGraw-Hill(1997)estimatesthatthesamecapital-gainstaxreductionwouldlowerthe
netcostofcapital(total,1998to2007)by3 .0% .
Cost of capital and the stock of capital
Thedegreetowhichcapitalgainstaxeslowerthestockofcapitaldependscriticallyonhowsen-
sitivebusinessesaretothecostofcapital .Thatis,towhatextentdofirmschangetheircapital
investmentwhentheircostofcapitalchanges .RobertChirinkoandAndrewMeyer(1997)quan-
tifythesensitivityofinvestmentspendingtotheusercostofcapitalandestimatethata1%
increaseintheusercostofcapitalresultingfromanincreaseinbusinesstaxeswoulddecrease
capitalinvestmentby0 .05to1 .7% .[26]Milliganetal .(1999)estimatethesensitivityofinvestment
tochangesintheusercostofcapitalinCanada .Theyestimatethatageneraldecreaseintheuser
costofcapitalofabout1 .2%isassociatedwitha1 .0%increaseininvestmentandthata4 .0per-
centage-pointreductionincapitalgainstaxesleadstoa1 .0%to2 .0%increaseininvestment .
23 It is important tonote thatCanada’s taxsystemcontainsnumerousmeasures toexcludesomecapitalgainsfromimmediatetaxation .Forexample,capitalgainsrealizedinRRSPsandotherregisteredplansarenotimmediatelytaxed .
24 Milligan,Mintz,andWilson(1999)claimthattheresponseofsharepricestochangesincapitalgaintaxesprovides “direct evidence” that these changes have an impact upon firms’ user cost of capital . That is,changesincapitalgainstaxeschangetherateofreturnrequiredbyinvestorsandthushaveanimpactuponthepricethatinvestorsarewillingtopayforsharesofthecompany .Numerousempiricalstudieshaveexaminedtheimpactofcapitalgainstaxesonshareprices:seeAmoako-Aduetal .,1992;McKenzieandThompson,1995;GuentherandWillenborg,1999;Shackelford,2000;andBlouinetal .,1999,2003 .
25 Itisimportanttonotethedifferencebetweenapercentage-pointchangeandapercentchange .If,forex-ample,thecurrentcapital-gainstaxratewereincreasedfrom30%to35%,thechangecouldbeinterpretedasa5percentage-pointincreaseora16 .7%increase[(35−30)/30×100] .
26 AmorerecentpaperbyRobertChirinkoandcolleagues(1999)investigatestheresponsivenessofbusinesscapitalformationtoitsusercost .Theauthorsfindthathigherusercostsdoindeedreducecapitalforma-tion .Specifically,theyestimateausercostelasticityofapproximately−0 .25,meaningthata1%increaseintheusercostofcapitalwoulddecreasecapitalformationby0 .25% .Inaddition,theyconcludethatreduc-ingthecapital-gainstaxratewouldhaveapositiveimpactuponthelong-runcapitalstock .
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1� / The Economic Costs of Capital Gains Taxes
Conclusion
CapitalgainstaxeslowerthestockofcapitalinCanada .ByincreasingthecostofcapitaltoCana-
dianbusinesses,capitalgainstaxesmakecapitalinvestmentsmoreexpensiveandreducesthe
amountofinvestmentthattakesplace .Asmalleramountofcapitaldecreasestheproductivity
ofCanadianworkersandultimatelylowersCanadianlivingstandards .
3 Entrepreneurship and risk-taking
Entrepreneursandtheirfinanciers[27]arecriticaltoasuccessfuleconomyinthattheychal-
lengethestatusquo,advancetechnology,developnewproductsandservices,createjobs,and
increasewealth .Unfortunately,capitalgainstaxeshaveanegative impactontheleveland
financingofentrepreneurship .
Entrepreneursrisktheirowncapitalandtimeinhopesofprofitingfromanunproven
product,service,ortechnology .Inaddition,manyentrepreneursdeveloptheirinnovationswith
thehelpofventurecapitalistswhoprovidefinancing,industryknowledgeandmanagerialknow-
how .Typically,entrepreneursandtheirfinanciersacceptlow,ifany,currentcompensationinthe
hopeofsubstantialfuturereturns .Thatis,theyagreetoalowpayoutearlyintheventureinorder
toincreasethevalueoftheircompanythroughthereinvestmentofearnings .Bothentrepreneurs
andfinanciersexpecttobecompensatedwhenthebusinessmaturesandgeneratessignificant
returns,istakenpublicandlistedonthestockmarket,orisboughtoutbyanothercompany .
Capitalgainstaxesreducethereturnthatentrepreneursandinvestorsreceivefromthe
saleofthebusiness,thereturnforrisk-taking,innovation,hardwork,andlowcurrentcompen-
sation .Thenumberofsuchrisktakersandfinanciers,andtheamountofmoneytheyarewilling
toinvest,decreaseswhenthepotentialreturnsdecrease .Theresultisalowerlevelofeconomic
growth,lowerlevelofjobcreation,andultimatelyalessprosperouseconomy .
Capitalgainstaxesalsohaveanimpactupontheabilityofentrepreneurstoattractkey
managersfromthetraditionalbusinesssector .Sincestart-upscannotusuallyofferwagesthat
arecompetitivewiththoseinthetraditionalbusinesssector,managersarerecruitedtostart-ups
throughownershipstakesinthebusiness .Capitalgainstaxesreducethereturnthesemanagers
receive,whichreducesthelikelihoodthatstart-upswillbeabletoattractthenecessarytalent
growthrequires .
Thereisagrowingbodyofacademicresearchinvestigatingtheimpactofcapitalgains
taxesonentrepreneurship .Moststudiesfocusonhowalowerrateofreturnresultingfrom
capitalgainstaxesaffectstheactorsintheentrepreneurialprocess—theentrepreneursand
theirfinancers .Inaddition,somerecentstudiesexaminetheimpactofcapitalgainstaxeson
whatisperhapsentrepreneurs’mostsignificantcontributiontoeconomicgrowth,innovation
andthecreationofideas .
27 I .e .“venturecapitalists .”Venturecapitalismoneyinvestedinnew(“start-up”),andpotentiallyhigh-growth,smallbusinesses .Venturecapitalderivesfromseveralsources:(1)formalventurecapital,whichconsistsprimarilyofventurecapitalfundswhereindustryexpertsmanageaportfolioofventureinvestments;(2)informalsources,suchas“love”capitalfromfriendsandfamily,and;(3)wealthyindividualswithbusinessexperience(“Angels”),whoprovidecapitalandbusinessexpertisetonewfirms .
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The Economic Costs of Capital Gains Taxes / 1�
ProfessorJamesPoterba(1989)providedthetheoreticalgroundworkforexaminingthe
impactofcapital-gainstaxpolicyonentrepreneurship .Poterbahighlightedanimportantlink
betweencapitalgainstaxesandthedemandforventurecapitalfunding:potentialentrepre-
neurscomparedthecompensationobtainedfromemploymentatanestablishedfirmwiththe
expectedpayofffromastart-upwherealargershareoftheircompensationwouldconsistofa
capitalgain .Poterbaconcludedthatbychangingtherelativetaxburdens,areductionincapital
gainstaxesattractsmoremanagersofhigherqualitywhobecomeentrepreneursanddemand
venturecapital .
HarvardeconomistsPaulGompersandJoshLerner(1998)madeanempiricalexamina-
tionofPoterba’sargumentbyexploringthekeydriversofventurecapitalfunding .Analyzing
thestockofventurecapitalandtaxratesoncapitalgainsfrom1972to1994,GompersandLerner
foundthataonepercentage-pointincreaseintherateofcapitalgainstaxwasassociatedwith
a3 .8%reductioninventurecapitalfunding .[28]
Morerecently,ChristianKeuschniggandSorenBoNielsen(2004a),writingintheJour-
nal of Public Economics,investigatedtheimpacttaxesandotherpublicpolicies(i .e .subsidiesto
supportnewfirms)hadonthecreationandsuccessofbusinessesthatwerefinancedbyventure
capital .Intheiranalysis,theauthorsincludedthemanagerialeffortandadvicethatventure
capitalistsprovidedtoentrepreneursinadditiontofinancing .KeuschniggandNielsenfound
that“evenasmallcapitalgainstax…diminishesincentivestoprovideentrepreneurialeffort”
(2004a:1033) .
Morerecently,DonaldBruceandMohammedMohsin(2006)presentedanempirical
analysisoftaxpolicyandentrepreneurshipintheUnitedStates .Theauthorsexaminedper-
sonalincome-taxrates,capitalgainstaxes,andcorporateincome-taxratesonself-employment
rates(aproxyforentrepreneurship) .[29]BruceandMohsinfoundthataonepercentage-point
reductioninthecapital-gainstaxrateisassociatedwitha0 .11to0 .15percentage-pointincrease
inself-employmentrates .
DaRinetal .(2006)examinedtheimpactanumberofgovernmentpolicieshadonnew
ventures(start-upbusinesses)in14Europeancountriesfrom1988to2001 .Theauthorsusedtwo
measurestodeterminewhetherpoliciesweresuccessful:theproportionofhigh-technology
investmentstototalventureinvestments(high-techratio)andtheproportionofearly-stage
investmentstototalventureinvestments(early-stageratio) .Theauthorsfoundthatthreepoli-
ciesworkedwelltoincreasetheproportionofhigh-techandearly-stageventures:(1)openinga
newventurestockmarket,(2)reducingthecapitalgainstaxand,(3)reducinglabourregulation .
28 DanielSandler(2004)foundthatmuchoftheresearchstemmingfromPoterba(1989)didnotincludetheinformalventure-capitalmarket .HeexplainedthatPoterba(1989) ignoredthe38 .0%offirmslaunchedwithoutoutsideinvestorsandfinancedby“lovecapital”(fundingfromfriendsandfamily)ordebtfinanc-ing .WhilethereiscurrentlylittleempiricalresearchonhowmuchindividualsacrossCanadaarecontribut-inginformallytoentrepreneurship,estimatesoftheimpactofcapitalgainstaxonentrepreneursandtheirdemandforventurecapitalislikelyunderstated .
29 Theauthorsusefourdifferentmeasuresofentrepreneurship:(1)thenumberofindividualincome-taxre-turnswithincomefromasmallbusiness/professionorfarm,asashareofallindividualincome-taxreturns(fromInternalRevenueService);(2)sameas(1)butaddingincome-taxreturnsfrompartnershipsandsmallbusinesscorporations(fromIRS);(3)thenumberofallnon-agriculturalworkersaged16andolderwhoareself-employed(fromtheBureauofLaborStatistics);and(4)sameas(3)butincludingtheagriculturalsector(fromBLS) .
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1� / The Economic Costs of Capital Gains Taxes
Conclusion
Capitalgainstaxeshaveadetrimentalimpactonthenumberofentrepreneursandrisk-takers .
Entrepreneursandtheirfinanciersarecriticaltoasuccessfuleconomybecausetheychallengethe
statusquo,advancetechnology,developnewproductsandservices,createjobs,andincrease
wealth .Theseindividualstradeofflowcurrentcompensationbecausetheyexpecttogener-
atesignificantfuturereturns .Capitalgainstaxesreducethereturnthatentrepreneurs,venture
capitalists,andotherinvestorsreceivefromrisk-taking,innovation,andwork .Lowerexpected
returnsdecreasesthenumberofentrepreneursandrisk-takersandultimatelyreducesinvest-
ment,technologicaladvances,employment,andoveralleconomicgrowth .
4 Other costs associated with capital gains taxes
Theeconomiccostsoutlinedinthepreviousthreesub-sectionsresultbecausecapitalgains
taxeschangetheincentivesforproductivebehaviour .Inadditiontothesecosts,capitalgains
taxesalsoimposecomplianceandadministrativecosts .Compliancecostsareincurredwhen
individualsandfirmsconsumeresourcestocomplywithtaxregulations .Administrativecosts
arethoseexpensesincurredbygovernment—ultimatelypaidforbycitizens—tomanageand
maintainthetaxcollectionsystem .Finally,therearealsocostsassociatedwiththeevasionof
capitalgainstaxesinthatresourcesspentofevadingthetaxcanbeputtomoreproductive
uses .Thecomplianceandadministrativecostsandevasionofcapitalgainsarediscussedin
moredetailinthissection .
Compliance costs
Taxcompliancecostsareincurredwhenfulfillingtherecordingandfilingrequirementsassoci-
atedwithpayingatax .Thesecostsincludesuchexpensesasbookkeeping,reporting,calculat-
ing,andremittingtaxpayments .Unfortunately,therearenoCanadianstudiesthatmeasurethe
compliancecostsassociatedwithcapitalgainstaxes,presumablybecausecapitalgainsaretaxed
asnormalincomeinCanada .However,thereareafewstudiescoveringothercountriesthatare
relevanttoouranalysisofcompliancecostsinCanada .
BlumenthalandSlemrod(1992)foundthatAmericantaxpayerswhoreceivedcapital
gainsincomeincurredhighercompliancecoststhanthosewhodidnot .Fromasurveyof2,000
Minnesotahouseholds,theauthorsfoundthathavingcapitalgainsincreasedthetimeindividu-
alsspentonpayingtaxesby7 .9hours,increasedthemoneytheyspentonprofessionaltaxassis-
tancebyabout$21,andincreasedthetotalcostofcomplianceby$143pertaxpayer(allfiguresin
1989USdollars) .Tran-Nametal .(2000)foundthatcapitalgainstaxesimposedsignificantcompli-
ancecostsonAustralianfirms:6 .8%oftotalincometaxrevenuecollected(includingincometax
revenuegeneratedfromcapitalgains) .
Vaillancourt(1989)examinedcomplianceandadministrativecostsforpersonalincome
taxesinCanada .Sincecapitalgainsaretaxedthroughtheincome-taxsysteminCanada,this
studyprovidessomeusefulinsightsintothecompliancecostsforcapitalgainstaxes .Villain-
courtfoundthatcomplianceandadministrativecostsforpersonalincometaxes(thetwocosts
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The Economic Costs of Capital Gains Taxes / 1�
werenotdelineated)weresome6 .9%oftaxescollected,whichhedeemedtobeinlinewith
internationalstudies(1989:83) .[30]
Whileveryfewstudiesmeasurecompliancecostsassociatedwithcapitalgainstaxes,
thestudiesreviewedaboveclearlyindicatethattherearepositivecompliancecostsincurredby
individuals,families,andbusinessesinadditiontothedirectcostsoftaxation .Thesecostsmust
betakenintoconsiderationwhenassessingtaxpolicy .
Administrative expenses
Inadditiontocompliancecostsindividuals,families,andbusinessespaywhencomplyingwith
capital-gainstaxregulations,therearealsocostsassociatedwithcollecting,administering,and
managingthecollectionofcapitalgainstaxes .Thesecostsaredirectlyincurredbygovernments
thatcollecttaxesbutareultimatelybornebycitizens .Aswasthecaseforcompliancecosts,evi-
denceforadministrativecostsisgenerallylimitedandunfortunatelynostudiesspecificallyana-
lyzethecostsassociatedwithcapitalgainstaxes .
Vaillancourt(1989)examinestheadministrativecostsassociatedwithpersonalincometax-
esandtwopayrolltaxes(CPP/QPPandUI) .Thecostsincludeprocessingcosts,administrationand
accommodationcosts,capitalexpenses,andlitigationcosts .Vaillancourtconcludedthatthetotal
administrativecosttothefederalgovernmentforthesethreetaxesin1986/87was$642million .These
costsrepresentedroughly1 .0%ofthegrossrevenuescollectedbythesethreetaxsources .[31]
Theadministrativecostsassociatedwithcapitalgainsmustalsobetakenintoconsider-
ationwhenconsideringthetotalcostsoftaxes .Whilenodirectestimatesforthesecostsexistfor
capitalgainstaxes,thenumerousregulationsinCanada’staxcodetodeterminethevaluation
andtimingofcapitalgainsindicatethatadministrativecostssurelyexistasCanadaRevenue
Agencyusesmanyagents,auditors,andlawyerstomonitorandenforcetheseregulations .
Tax evasion
Capitalgainstaxeshavealsoledsometaxpayerstoevadethepaymentofthetax .Thelevelof
taxevasionistheextenttowhichactualtaxrevenuecollectedbygovernmentdiffersfromthat
whichwouldhavebeencollectedifeverytaxpayerpaidexactlywhatisrequiredbylaw .Taxeva-
sionhasimportantimplicationsfortheefficiencyoftaxes,sinceresourcesspentonevadingthe
taxcouldbeputtomoreproductiveuses .
ProfessorJamesPoterba’sstudyintheAmerican Economic Review(1987b)wasapath-
breakingworkinmeasuringtherelationshipbetweencapitalgainstaxesandtaxevasion(see
alsoPoterba,1987a) .Hefoundthatcapitalgainstaxeshaveasignificantimpactontaxevasion:
30 MajaKlun(2004)providesareviewoftheempiricalliteratureofcompliancecostsassociatedwithpersonalincometaxinCanada .Inaddition,ProfessorBrianErard’sreport(1997b)fortheTechnicalCommitteeonBusinessTaxationconcludedthatthecomplianceburdenforincomeandcapitaltaxesforlargecompaniesinCanadaequalledroughly5%oftaxespaid .
31 Vaillancourt(1989)didnotcalculateadministrativecostsasapercentageofgrossrevenues .Thiscalcula-tionwascompletedbytheauthorsofthisstudy .Revenuesfrompersonalincometaxes,CPP/QPP(CanadaPensionPlanandQuebecPensionPlan),andUI(UnemploymentInsurance,now‘EI’orEmploymentInsur-ance)arefromtheNationalEconomicAccounts .Administrativecostsaredividedbyrevenuesfromthesethreesourcestoobtainthe1 .0%figure .
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20 / The Economic Costs of Capital Gains Taxes
a1 .0%decreaseinthecapitalgainstaxrateincreasesthereportedtaxbaseby0 .4% .[32]Inaddi-
tion,heestimatesthatforataxpayerwithanincomeof$100,000andcapitalgainsof$20,000,a
reductioninthetaxpayer’staxratefrom45 .0%to33 .0%(e .g .theUnitedStates’TaxReformAct
of1986)wouldreducetheprobabilityofthetaxevasionfrom72 .0%to55 .0% .
AmorerecentstudybyWayneLandsman,DouglasShackelford,andRobertYetman
(2002)buttressthisconclusionwithevidencefromauniquedatasetofshareholderinforma-
tionfromthe1989leveragedbuyoutofRJRNabisco .Theyestimatethataonepercentage-point
increaseinthemarginaltaxrateoncapitalgainsisassociatedwitha0 .42%increaseinevasion .In
addition,theauthorsfindthattheaveragelevelofevasionwas11 .0%ofthetotalcapitalgains .
Unfortunately,therearenospecificestimatesoftowhatdegreetaxpayersevadecapital
gainstaxesinCanada .StudiescoveringtheUnitedStates,however,showthatthereisindeed
somedegreeofevasionassociatedwithcapitalgainstaxes .
Conclusion
Inadditiontothedamagingeconomiccostsofcapitalgainstaxesresultingfromchangesin
theincentivesfacesbyindividualsandbusinesses,capitalgainstaxesalsoimposecompliance
andadministrativecosts .Compliancecostsarethoseexpensesassociatedwithcomplyingwith
taxregulationsandadministrativecostsarethoseexpensesincurredbygovernment—andulti-
matelypaidforbycitizens—tomanageandmaintainthetaxcollectionsystem .Finally,thereare
alsocostsassociatedwiththeevasionofcapitalgainstaxesinthatresourcesspentofevading
thetaxcanbeputtomoreproductiveuses .Whileveryfewdirectstudieshavebeendone,the
estimatesavailableclearlyindicatethattherearepositivecomplianceandadministrativecosts
andsomedegreeofevasionassociatedwithcapitalgainstaxes .
5 Efficiency costs of capital gains taxes
Alltaxesimposeefficiency(economic)costsonsocietybecausetheydistortthebehaviourof
individuals,families,andbusinesses .Asdiscussedabove,capitalgainstaxesreducetheafter-tax
rateofreturnoncapitalinvestments;theycreateanincentiveformanyinvestorstoholdonto
theirinvestmentseventhoughmoreprofitableopportunitiesexist;andtheyreducethereturn
thatentrepreneurs,venturecapitalists,andotherinvestorsreceivefromrisk-taking,innovation,
andworkeffort .Ultimately,thechangesinincentivescausedbycapitalgainstaxesimpedethe
turnoverofolder,lessprofitable,investments,reducethesupplyofentrepreneursandtheinves-
torsthatfinancethem,andreducetheoveralllevelofaccumulatedcapital .
Numerousstudies,bothacademicandcommissionedbygovernment,haveestimated
theeconomiccostofdifferenttypesoftaxes .[33]Theresearchreliesonwhatisreferredtoas
32 Poterba’sworkisuniquebecausehefocusseduponcapitalgainstaxationalone .Therehasbeenmuchworkdoneonincometaxcomplianceandevasioningeneral:seeAllinghamandSandmo,1972andYit-zhaki,1974foratheoreticalreview;seeFeinstein,1991foranempiricalanalysisofincometaxevasion .
33 AcriticalcontributiontothisfieldwasbyNobelLaureateJamesMirrleeswhointheearly1970sdevelopedthetheoryofoptimaltaxation .ThecoreofMirrless’watershedworkwasthatgovernmentsshouldachievegivenrevenuerequirementsbychoosingtaxesthathavethebestsocialwelfareoutcome(Mirrlees,1971,1972;DiamondandMirrlees,1971) .
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The Economic Costs of Capital Gains Taxes / 21
the“marginalefficiencycost”(MEC) .TheMECmethodologyprovidesamechanismbywhichto
estimatethecostofdifferenttaxesbycalculatingtheefficiencycostofraisingoneadditional
dollarofrevenue .[34]
OneofthemostwidelycitedcalculationsofMECsarethosebyDaleJorgensenandKun-
YoungYun(1991) .TheauthorsestimatetheMECsofselectUStaxesandfindthatcapital-based
taxes(suchascapitalgainstaxes)imposesignificantcostsontheeconomy .Theyconcludedthat
capitalincometaxes(dividend,interest,&capitalgains)imposedamarginalcostof$0 .92(MEC)
foroneadditionaldollarofrevenue(table2) .Incomparison,itcoststheeconomyonly$0 .26to
raiseanadditionaldollarofrevenueusingconsumptiontaxes .
TheCanadiangovernment’sDepartmentofFinancerecentlypublishedastudybyBaylor
andBeauséjour(2004)thatcalculatedthelong-termeconomiccostsimposedbythemaintaxes
usedinCanada .[35]BaylorandBeauséjourestimatedthebenefitsfroma$1taxreductionfor
anumberofdifferenttypesoftaxesandtheirresultssupportJorgensenandYun’searlierMEC
estimatesfortheUnitedStates .[36]BaylorandBeauséjour’sresults(table3)showthatthere
aresignificantbenefitstosocietyfromdecreasingcapital-basedtaxessuchaspersonalcapital
incometaxes(dividends,capitalgains,andinterestincome) .[37]Specifically,a$1decreasein
personalincometaxesoncapitalincreasessociety’swell-beingby$1 .30 .Comparatively,the
smallestbenefit($0 .10)isgeneratedfromareductioninconsumptiontaxes .[38]
Conclusion
Estimatesofthemarginalefficiencycost(MEC)ofbothAmericanandCanadiantaxesindicate
thattaxesonpersonalcapitalincome(dividends,capitalgains,andinterestincome)imposesub-
stantialcostsontheeconomy .RecentestimatesfromthefederalDepartmentofFinanceshow
thata$1reductionintaxesonpersonalcapitalincome(dividends,capitalgains,andinterest
income)increasessociety’swell-beingby$1 .30 .Inaddition,thesetaxeswereshowntobemuch
morecostlythanothertypesoftaxessuchasconsumptionandpayrolltaxes .
34 ItiscriticaltonotethattheMECofataxisanestimateofthecostofraisingoneadditionaldollarofrevenue .ThismeansthattheMECisameasureofmarginalorincrementalcostandshouldbeusedtomeasurethebenefitsofsmallorincrementaltaxshifts .TheMECcannotbeusedtomeasurethetotalorevenaveragecostoftaxes .
35 BaylorandBeauséjourcalculatedthebenefitsfromreducingtaxesandassumedthatthetaxrevenueslostduetothetaxcutswereoffsetbyanon-distortionary,lump-sum,taxincrease .Inotherwords,thetaxchang-eswererevenueneutral .Inaddition,lump-sumtaxesareassumednottodistortthebehaviourofindividualsandfirmsbecausetheydonotalterrelativeprices .SeeMankiw,2005forfurtherdetailsonlump-sumtaxes .
36 EstimatesoftheMECforCanadiantaxeshavebeencalculatedbythefederalDepartmentofFinanceandpublishedbytheOrganisationforEconomicCo-operationandDevelopment (OECD,1997)butunfortu-natelydonotspecificallyestimatetheMECofindividualcapitalincometaxes .However,thestudydidfindthatcapital-basedtaxes,becauseoftheirincentiveeffects,tendtoimposemuchhighercostsonsocietythanothertaxessuchasconsumptiontaxes .Forexample,corporateincometaxes(MEC=$1 .55)andper-sonalincometaxes(MEC=$0 .56)imposemuchhighercoststhanother,moreefficient,typesoftaxessuchasthesalestax(MEC=$0 .17) .
37 Ultimately,Canadashouldmovetowardsan integratedflat-taxthatexcludestaxationonthereturntosavings(interestincome,dividendincome,&capitalgains) .SeeEmesetal .,2001foradetailedanalysisofaflattaxforCanada .
38 TheMinistryofFinanceinQuebecrecentlyevaluatedthebenefitstoQuebec’seconomyfromreducingdifferentprovincialtaxes(Quebec,MinistryofFinance,2005) .TheresultsoftheiranalysiscorroboratethefindingsofBaylorandBeauséjour .
The Fraser Institute / Studies in Entrepreneurship and Markets 4
22 / The Economic Costs of Capital Gains Taxes
Table 2: Estimates ($CDN) of the marginal efficiency cost (MEC) for selected US taxes
Capital income taxes (individual and corporate) $0 .92
Corporate income tax $0 .84
Individual income tax $0 .60
Payroll tax $0 .48
Sales tax $0 .26
Source: JorgensenandYun,1991 .
Table 3: Welfare gains from reductions in various taxes [a]
Capital Cost Allowance $1 .40[b]
Sales Tax on Capital Goods $1 .30
Personal Capital Income Tax $1 .30
Capital Tax $0 .90
Corporate Income Tax $0 .40
Average Personal Income Tax $0 .30
Wage Tax $0 .20
Consumption Tax $0 .10
[a]Revenuelossisassumedtoberecoveredthrough“lump-sum”taxation .Welfaregainsarecalculatedasthegainineconomicwell-beingperdollaroftaxreduction .[b]Theestimateforanincreaseincapitalcostallowances(CCA)isfornewcapitalonly .IncreasingCCAisnotataxreductionpersebutratheranincreaseinadeductionagainstcorporateincometaxes .Source: BaylorandBeauséjour,2004 .
The Fraser Institute / Studies in Entrepreneurship and Markets 4
The Economic Costs of Capital Gains Taxes / 2�
4 Recommendation—eliminate capital gains taxes
Giventherelativeefficiencyofothertypesoftaxes,Canadiangovernments,bothfederaland
provincial,shouldeliminatecapitalgainstaxes .Therevenuelossfromsuchamovewouldbe
smallgiventhatcapitalgainstaxesaccountedforlessthanonepercent(0 .8%)oftotalfederal
andprovincialgovernmentrevenuein2005/06 .
Iflostrevenuesmustbereplaced,other,lesscostly,formsoftaxationshouldbeused .In
fact,theextenttowhichothertaxeswouldhavetoberaisedtoreplacethelostrevenuefrom
capitalgainstaxeswouldmostlikelybemuchsmallerthantheamountofrevenuelost .That
is,theeliminationofthetaxisexpectedtoincreaseeconomicefficiencyandleadtoincreased
revenuecollectedfromothertaxes .ArecentstudybyHarvardeconomistsGregoryMankiw
andMatthewWeinzierlfoundthat,“inalmostall,casestaxcutsarepartiallyself-financing .This
isespeciallytrueforcutsincapitalincometaxes”(2006:1431) .MankiwandWeinzierlsuggest
thatapproximately50%ofthelossofrevenuefromareductionincapitalincometaxwould
berecoveredthoughincreasedeconomicactivity .Whilecapitalgainstaxesarenotspecifically
modeled,MankiwandWeinzierldoprovidesomeevidencethattheeliminationofthetaxwould
bepartiallyself-financing .
Would eliminating capital gains taxes lead to “income shifting”?
Acommonobjectiontotheeliminationofcapitalgainstaxesisthatanincentivewouldbecre-
atedfortaxpayerstoshifttaxableincomeintonon-taxablecapitalgains,apracticeoftenreferred
toas“incomeshifting”or“surplusstripping .”Thatis,iftherewerenocapitalgainstaxes,busi-
nessownerswouldattempttoreducetheamounttheirbusinessesdistributeasdividendsand
insteadreinvestmoneyinthebusiness .Theownerscouldthenundertakelegalmanoeuvres
to“strip”thereinvestedfundsastax-freecapitalgains .Inaddition,anincentivewouldalsobe
createdforprofessionalsandotherswhooperatethroughawhollyownedcorporationtoshift
ordinarytaxableincomenormallypaidassalaryintonon-taxablecapitalgains .[39]
Grubel(2001)reviewedtheinternationalevidenceontheeffectsofhavingnocapital
gainstaxesandconcludesthatincomeshiftingwouldbelimitedbytwofactors:(1)methods
forincomeshiftingarecomplicatedandcostlyforsmallandwhollyownedbusinesses;and(2)
publiclytradedcompaniesfacestrictaccountingrulesandmarketdisciplinethatmakeitdifficult
toengageinsuchactivities .[40]Furthermore,severalcountriesdonothavecapitalgainstaxes
(figure2) .Forexample,HongKong,whichhasnocapitalgainstaxes,introducedlawsthatpro-
hibittaxavoidancethroughsurplusstrippingandestablishedaBoardofReviewtohearappeals
39 Seepages16–19inGrubel,2001fortwotheoreticalexamplesof“surplusstripping .”
40 Numerousparticipantsata1999FraserInstitutesymposiumoncapitalgainstaxeshadworkedinthefinan-cialsectorduringthe1960swhenCanadahadnocapitalgainstaxesandindicatedthatsurplusstrippingwasnotamajorproblematthattime(Grubel,2003) .
The Fraser Institute / Studies in Entrepreneurship and Markets 4
24 / The Economic Costs of Capital Gains Taxes
ofdisputeswiththetaxauthorities(HsuandYuen,2001) .WhileCanadaandHongKong’stax
systemsdiffergreatly,HongKong’sexperienceprovidesCanadawithanexampleofanti-avoid-
ancemeasuresthatcouldbeputintoplace .
The appropriate capital gains tax is zero
Awidebodyofacademicresearchhasrevealedthedamagingeconomiccostsofcapitalgains
taxes .Canadianswouldbemademuchbetteroffwithoutthistax .Eliminatingcapitalgainstaxes
wouldsubstantiallyincreaseprosperityinCanada .InthewordsofformerFederalReserveChair-
manAlanGreenspan,“[t]hemajorimpact[ofthecapitalgainstax]istoimpedeentrepreneurial
activityandcapitalformation .Whilealltaxesimpedeeconomicgrowthtooneextentoranother,
thecapitalgainstaxisatthefarendofthescale .Iarguedthattheappropriatecapitalgainstax
waszero”(Greenspan,1997) .
The Fraser Institute / Studies in Entrepreneurship and Markets 4
The Economic Costs of Capital Gains Taxes / 2�
Conclusion
Capitalgainstaxes,likeallformsoftaxation,raiserevenuesforthegovernmentbutalsoimpose
economiccosts .Unfortunately,thecostofcapitalgainstaxesisnotlimitedtotheamountof
taxcollected .Capitalgainstaxesimposeadditionalcostsontheeconomybecausetheyreduce
returnsoninvestmentand,thereby,causeindividualsandbusinessestoaltertheirbehaviour .
Asaresult,capitalgainstaxeshaveasubstantialimpactonthereallocationofcapital,thestock
ofcapital,andthelevelofentrepreneurshipinCanada .
Reallocation of capital
Capitalgainstaxessignificantlyimpedethereallocationofcapitalfromolder,lessprofitable,
investmentstothosewithhigherratesofreturn .Numerousacademicstudieshavefoundthat
investorsdoindeedlockintheircapitalinthepresenceofcapitalgainstaxesandthatthe“lock-in
effect”significantlyimpedeseconomicgrowth .Withouttheefficientflowofcapital,thedevel-
opmentofnew,potentiallyprofitable,businessesislimited .Giventhatthesenewventuresare
theenginesofproductivity,employment,andwealth-creation,capitalgainstaxesreducethe
economicwell-beingofallCanadians .
Stock of capital
CapitalgainstaxeshaveasignificantimpactonthestockofcapitalinCanadabyincreasingthe
costofcapitaltoCanadianbusinesses .Capitalgainstaxesmakecapitalinvestmentsmoreexpen-
siveandthuslessinvestmenttakesplace .Areducedamountofcapitalhasanumberofnega-
tiveconsequencesincludingdecreasesintheproductivityofCanadianworkersand,ultimately,
lowerCanadianlivingstandards .
Entrepreneurship and risk-taking
Capitalgainstaxeshaveadetrimentalimpactonthenumberofentrepreneursandrisk-takersin
Canada .Entrepreneursandtheirfinanciersarecriticaltoasuccessfuleconomyinthattheychal-
lengethestatusquo,advancetechnology,developnewproductsandservices,createjobs,and
increasewealth .Theseindividualstrade-offlowcurrentcompensationbecausetheyexpectto
generatesignificantfuturereturns .Capitalgainstaxesreducethereturnthatentrepreneurs,ven-
turecapitalists,andotherinvestorsreceivefromrisk-taking,innovation,andworkeffort .Lower
expectedreturnsdecreasesthenumberofentrepreneursandrisk-takersandultimatelyreduces
investment,technologicaladvances,employment,andoveralleconomicgrowth .
The Fraser Institute / Studies in Entrepreneurship and Markets 4
2� / The Economic Costs of Capital Gains Taxes
Compliance costs, administrative costs and tax evasion
Inadditiontothedamagingeconomiccostsofcapitalgainstaxesresultingfromchangesinthe
incentivesfacedbyindividualsandbusinesses,capitalgainstaxesalsoimposecomplianceand
administrativecosts .Compliancecostsareincurredbyindividualsandbusinesseswhentheful-
filltherecordingandfilingrequirementsassociatedwithpayingatax .Administrativecostsare
expensesincurredbygovernment—andultimatelypaidforbycitizens—tomanageandmain-
tainthetax-collectionsystem .Finally,therearealsocostsarisingfromtheevasionofcapitalgains
taxes:theresourcesspentinevadingthetaxcouldbeputtomoreproductiveuses .
Marginal efficiency cost (MEC) of capital gains taxes
Estimatesofthemarginalefficiencycost(MEC)ofbothAmericanandCanadiantaxesindicate
thatpersonalcapitalincometaxes(dividends,capitalgains,andinterestincome)imposesub-
stantialcostsontheeconomy .RecentestimatesfromthefederalDepartmentofFinanceshow
thata$1reductioninpersonalcapitalincometaxes(dividends,capitalgains,andinterestincome)
increasessociety’swell-beingby$1 .30 .Inaddition,thesetaxeswereshowntobemuchmore
costlythanothertypesoftaxessuchasconsumptionandpayrolltaxes .Asaresult,thereareeco-
nomicgainsavailabletoCanadiansfromshiftingawayfrompersonalcapitalincometaxes .
Recommendation—eliminate capital gains taxes
Giventherelativeefficiencyofothertypesoftaxes,Canadiangovernments,bothfederaland
provincial,shouldeliminatecapitalgainstaxes .Therevenuelossfromsuchamovewouldbe
smallgiventhatcapitalgainstaxesaccountedforlessthanonepercent(0 .8%)oftotalfederal
andprovincialgovernmentrevenuein2005/06 .Iflostrevenuesmustbereplaced,other,less
costly,formsoftaxationshouldbeused .
EliminatingcapitalgainstaxeswouldsubstantiallyincreaseprosperityinCanada .Inthe
wordsofformerFederalReserveChairmanAlanGreenspan,“[t]hemajorimpact[ofthecapital
gainstax]istoimpedeentrepreneurialactivityandcapitalformation .Whilealltaxesimpede
economicgrowthtooneextentoranother,thecapitalgainstaxisatthefarendofthescale .I
arguedthattheappropriatecapitalgainstaxwaszero .”
The Fraser Institute / Studies in Entrepreneurship and Markets 4
The Economic Costs of Capital Gains Taxes / 2�
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�2 / The Economic Costs of Capital Gains Taxes
About the authors
Jason ClemensistheDirectorofFiscalStudiesandtheDobsonCentreforEntrepreneur-
shipandMarketsatTheFraserInstitute .HehasanHonoursBachelorsdegreeofCommerce
andaMastersdegreeinBusinessAdministrationfromtheUniversityofWindsoraswellas
aPost-baccalaureatedegreeinEconomicsfromSimonFraserUniversity .Hehaspublished
studiesonawiderangeoftopics,includingtaxation,governmentspending,labour-market
regulation,banking,welfarereform,andeconomicprosperity .Hisarticleshaveappeared
insuchnewspapersastheWall Street Journal,Investors Business Daily,National Post,Globe
& Mail,Toronto Star,Vancouver Sun,Calgary Herald,Ottawa Citizen,Montreal Gazette,and
La Presse .MrClemenshasbeenaguestonnumerousradioprogramsacrossthecountry
andhasappearedontheCBC National News,CTV News,CBC Business Newsworld,CBC’s
CounterSpin,GlobalTV,BCTV,andReportonBusinessTVasaneconomiccommentator .
HehasappearedbeforecommitteesofboththeHouseofCommonsandtheSenateas
anexpertwitness .
Keith GodinisaPolicyAnalystintheDobsonCentreforEntrepreneurshipandMarketsat
TheFraserInstitute .HeholdsaBachelor’sdegreeineconomicsandaMastersdegreein
PublicPolicyfromSimonFraserUniversity .Histhesisfocusedonventurecapitalandentre-
preneurship .Hisrecentco-publicationsincludeMeasuring Labour Markets in Canada and
the United States,An Empirical Examination of Labour Relations Laws in Canada and the United
States,Union Disclosure in Canada and the United States,andCanadian Provincial Investment
Climate Report: 2007 Edition .SincejoiningTheFraserInstitute,Mr .Godinhaswrittenona
rangeofpolicyissuessuchastaxation,labourregulation,labour-marketperformance,and
fiscalpolicy .
Niels VeldhuisistheDirectoroftheCentreforTaxStudiesandAssociateDirectorofFiscal
StudiesatTheFraserInstitute .SincejoiningtheInstitutein2002,hehasbeentheauthoror
co-authorofthreebooksand21comprehensivestudiesonawiderangeoftopicsincluding
taxation,productivity,entrepreneurship,labourmarkets,andgovernmentfailure .MrVeld-
huishaswrittenover90articles,whichhaveappearedinover30newspapers,includingthe
National Post,Globe & Mail,andWall Street Journal .Heappearsregularlyonradioandtelevi-
sionprogramsacrossthecountryandhasappearedbeforecommitteesofboththeHouse
ofCommonsandtheSenateasanexpertwitness .MrVeldhuisholdsaBachelorsdegreein
BusinessAdministration,withjointmajorsinbusinessandeconomicsandaMastersDegree
inEconomicsfromSimonFraserUniversity .
The Fraser Institute / Studies in Entrepreneurship and Markets 4
The Economic Costs of Capital Gains Taxes / ��
Acknowledgments
WewouldliketoacknowledgeandthanktheJohnDobsonFoundationforitsfinancialsup-
portofthisprojectandtheCentreforEntrepreneurshipandMarkets .Wewouldalsolike
tothankProfessor(emeritus)JohnChantofSimonFraserUniversity,Dr .AlastairMurdoch,
Professor(emeritus)HerbertGrubelofSimonFraserUniversityandSeniorFellowatThe
FraserInstitute,andDavidPerryoftheCanadianTaxFoundationfortheirformalreviewof
thisstudy .Theircommentsandsuggestionswereinvaluableincompletingthisstudy .Any
remainingerrors,omissions,ormistakesremainthesoleresponsibilityoftheauthors .As
theauthorshaveworkedindependently,theviewsandanalysisexpressedinthisdocument
remainthoseoftheauthorsanddonotnecessarilyrepresentthoseofthesupporters,trust-
ees,orotherstaffattheFraserInstitute .
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