Assets are things people own that produce a stream of benefits every year. Another name for assets is ‘capital’. Some assets produce ready cash – think of the interest term deposits produce for you or the rent tenants pay landlords.
As well as producing ready cash or instead of it, some assets go up in value every year, producing what are called ‘capital gains’. Gains refers to the change in the value of the asset.
Capital gains taxes apply to the change in the value of assets. The government takes some of the price gain for itself, thank you very much. There are a lot of options for governments here but most countries that have capital gains taxes wait until the asset gets sold before calculating and collecting the capital gains tax. The capital gain is the difference between what the asset was bought for and what it was sold for, and the tax is applied to that difference in value. If a house is owned for 50 years, no capital gains tax is assessed until the end of the 50 year period. The proceeds from the sale of assets are then able to be used to pay the tax.
Capital taxes are very different. They apply to the value of the asset and are collected every year. A large part of the annual rates homeowners pay is a capital tax (the rest is typically fixed water charges and so on).
If the capital tax is 1.8% and someone owns $100,000 of their house (the balance being owned by the bank via the mortgage) then $1,800 would be paid as wealth tax by the owner of the asset every year. It doesn’t matter whether the asset produces ready cash to pay this tax bill, it has to be paid anyway. This is just the same as rates – landlords get rents to help them pay their rates, but ordinary home-owners have to find the money somewhere else.
Capital taxes can be additional to income tax, in this case you pay both. But in the Big Kahuna we integrated the proposed wealth tax (the ‘comprehensive capital income tax’) with income tax so that all assets are treated the same. At the moment assets that produce ready cash pay income tax, but assets that don’t, do not. Our CCI tax collects tax from assets that don’t currently pay income tax while not double-taxing those assets that produce ready cash.
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