Does anyone here have an interest in economics? I’m writing a post for my blog on that capital gains tax is unrelated to economic growth but is actually mostly a wealth tax that kills the goose that lays the golden eggs, even from a state’s perspective. I’m writing in Swedish but the argument is basically this:
Consider an isolated island with an unchanging money supply of gold coins. Because the money supply is fixed, growth will lead to falling asset prices. One year there are ten huts and ten canoes with a total value of a hundred gold coins. A decade later there are ten brick houses and twenty canoes whose total value is still one hundred gold coins.
If all the islanders got richer at the same pace then the number of coins that anyone’s assets was worth never increased and the island chief got no capital gains tax at all, even though there was high economic growth. (Only if someone grew richer faster than the others the price of that person’s assets increased, but only as much as others’ decreased.)
Now let’s introduce inflation. Due to a change in ocean currents a steady stream of wreckage laden with gold begins to wash up on the shores. The price of everyones’ assets rises a lot and suddenly the chief gets capital gains tax from everyone, even if there was no economic growth at all because everyone was busy searching the beach for coins.
This means that a capital gains tax is actually not a tax on production or wealth increase but rather a tax on wealth that consumes capital at a rate determined by inflation. A 30% capital gains tax and a common 7.5% annual increase of the money supply translates into a 7.5% * 30% = 2.25% annual wealth tax.