Capital Gains Tax is an unfair tax and has too many exemptions to be Essay

Capital Gains Tax is an unfair tax and has too many exemptions to be useful and is not consistent with the ideals of Adam Smith - Essay Example The rules regarding exemptions are such that rich people often find ways to avoid taxes by making investments in certain specified areas hence paying even less taxes than the poor. This defies the canon of equality put forward by Adam Smith. According to canon of equality, the rich should pay more taxes than the poor, or at least, in proportion to their income. Capital gains tax allows many exemptions and allowable deductions and the rich are able to make the most out of them. Further, according to the canon of certainty, the measurement of taxes should be easily understandable and the taxpayer should not be uncertain about the calculation and determination of tax liability. Capital gains tax is very complicated and often tends to confuse the taxpayers a lot. Capital Gains Tax was introduced in the UK in 1962. It was introduced so that avoidance of tax could be curtailed. Taxpayers used the distinction between income and capital, and made their profits under the head of capital becau se it was free from tax. A flat rate of tax of 30% was introduced in 1965 on all capital gains, but it failed because taxpayers on whom the greater rate of tax was applicable still had an incentive to realize their profits under capital gains. On the other hand, the taxpayers who were subject to lower rates of tax ended up paying more if they had realized a profit under capital gain. Further, there was no allowance for inflation. This meant that the gains that had a significantly low present value, or had ceased to be â€Å"gains† were also charged to tax. Therefore, capital gains tax has been problematic since its very inception. The problem of impact of inflation on capital gains tax was curtailed very much due to a system of indexation that was introduced in 1982. This system was supposed to have made the capital gains tax very fair. However, once the inflation itself was brought under control, the value of this system started to diminish. Therefore, a new system called Ta per’s Relief was introduced in which the capital gain was reduced according to the period of taxpayer’s ownership of the asset. This relief did not prove to be successful in the long-run and was abandoned. It was somewhat useful to the business sector which is why it was demanded to be reinstated. In response, a different type of relief called Entrepreneur’s Relief was introduced. This relief applies where a whole or part of a business is sold. It also applies to the disposal of assets of the business after it has stopped. The disposals must be made by individuals who were involved in the running of the business. Entrepreneur’s relief is also applicable on gains on disposals of shares in a trading company. However, the individual making the disposal must have been an employee of the company and own at least five per cent of the ordinary share capital of the company. Entrepreneur’s Relief requires that a clear distinction is to be made between †˜business asset’ and a ‘non-business asset’. One of the biggest problems with this relief is that it is more generous for ‘business assets’ and less for ‘non-business assets’. It is almost impossible to explain why this differentiation has been made. The definition of capital assets involves cars and houses for personal use. These are the most valuable and personal assets of common people. It has often been debated whether it is right to tax the gains obtained by selling of these assets. Probably the biggest