Capital gains tax is a tax on income from the sale of capital assets, which include stocks, bonds, real estate, and business partnerships. The difference between the amount that was paid for an asset when it was purchased and the amount it sold for is the capital gain. Taxes are paid only on that amount. Most countries treat capital gains more favorably than ordinary income, such as wages, interest, and dividends (money paid to the owner of a stock by a corporation). The favorable treatment could include a lower tax rate or of an exclusion of some of the income from the tax. In many countries—including Canada, the United Kingdom, and the United States—profits made on the sale of a home are not taxed as capital gains.
Experts disagree over whether capital gains should be taxed at a lower rate than ordinary income. Some favor a lower rate as a means of encouraging savings, investment, and the sale of capital assets. Another argument in favor of taxing capital gains at a lower rate is that it compensates for artificial “gains” in an asset’s value due to inflation (a continual increase in prices throughout a nation’s economy). Opponents of lower rates stress that such rates primarily benefit higher-income people. These experts believe that adjustments for inflation could instead be made by adjusting the method used to measure income from the sale of capital assets. Some people fear that low capital gains tax rates result in governments receiving less money in taxes. But some people believe that low rates of tax on capital gains may actually increase the amount of taxes a government collects because it encourages the sale of capital assets.
