i THE IMPLICATIONS OF CAPITAL GAINS TAX RATE PREFERENCES The Implications of Capital Gains Tax Rate Preferences for Personal Taxpayers in Australia John Minas (Student Number: 3152758) A thesis in fulfilment of the requirements for the degree of Doctor of Philosophy THE UNIVERSITY OF NEW SOUTH WALES Thesis/Dissertation Sheet Surname or Family name: Minas First name: John Other name/s: William Abbreviation for degree as given in the University calendar: PhD School: Taxation and Business Law Faculty: UNSW Business School Title: The Implications of Capital Gains Tax Rate Preferences for Personal Taxpayers in Australia Abstract 350 words maximum: (PLEASE TYPE) This thesis examines key aspects of one of the more controversial questions in tax policy-what is the appropriate way to tax capital gains? The focus of the thesis is the capital gains tax (CGT) rate and rate preferences. The research is by way of a review of the relevant tax literature on capital gains, followed by qualitative and quantitative studies and recommendations and conclusions. The literature review identifies an absence of empirical evidence on how Australian personal taxpayers respond to CGT rate changes. This significant gap in the knowledge is the primary motivation for this thesis. The qualltative study presents findings from in-depth interviews conducted with 24 CGT experts in Australia, Canada and the United States on issues related to the taxation of capital gains, In particular, it explores the role of CGT preferences. The interview data are compared with relevant tax literature as well as current practices in the three jurisdictions in taxing capital gains. The study establishes that most interviewees do not support CGT rate preferences. Armed with this background, the quantitative study uses regression analysis to estimate the capital gains realisations response In Australia, with the tax rate change of interest being the enactment of the 50% CGT discount in 1999 for personal taxpayers. The elasticity point estimates from the quantitative study support the primary hypothesis: that the 50% CGT discount has caused a decrease in CGT revenue. More specifically, the estimates imply CGT revenue losses. This raises questions about the central rationale for the introduction of the CGT discount-the forecast increase in CGT revenue. The qualitative and quantitative results are drawn on to recommend a tax policy reform to improve the operation of the CGT regime in Australia. Specifically, reinstating taxation of personal capital gains at marginal rates and introducing an annual exempt amount for net capital gains. Declaration relating to disposition of project thesis/dissertation I hereby grant to the University of New South Wales or its agents the right to archive and to make available my thesis or dissertation in whole or in part in the University libraries in all forms of media, now or here after known, subject to the provisions of the Copyright Act 1968. I retain all property rights, such as patent rights. I also retain the right to use in future works (such as articles or books) all or part of this thesis or dissertation. I also authorise University Microfilms lo use the 350 word abstract of my thesis in Dissertation Abstracts International (this is applicable to doctoral theses only). The University re�gnises that there may be exceptional circumstances requiring restrictions on copying or conditions on use. Requests for restriction for a period of up to 2 years must be made in writing. Requests for a longer period of restriction may be considered in exceptional circumstances and reaulre the aoproval of the Dean of Graduate Research. FOR OFFICE USE ONLY Date of completion of requirements for Award: 111 THE IMPLICATIONS OF CAPITAL GAINS TAX RATE PREFERENCES Originality Statement 'I hereby declare that this submission is my own work and to the best of my knowledge it contains no materials previously published or written by another person, or substantial propmiions of material which have been accepted for the award of any other degree or diploma at UNSW or any other educational institution, except where due aclmowledgement is made in the thesis. Any contribution made to the research by others, with whom I have worked at UNSW or elsewhere, is explicitly acknowledged in the thesis. I also declare that the intellectual content of this thesis is the product of my own work, except to the extent that assistance from others in the project's design and conception or in style, presentation and linguistic expression is aclmowledged.' Signed ............. Date ................. ...... 1/.�./.��.l.1... ................. iv THE IMPLICATIONS OF CAPITAL GAINS TAX RATE PREFERENCES Copyright Statement 'I hereby grant the University of New South Wales or its agents the right to archive and to make available my thesis or dissertation in whole or part in the University libraries in all formsof media, now or here afterknown, subject to the provisions of the Copyright Act 1968. I retain all proprietary rights, such as patent rights. I also retain the right to use in future works (such as articles or books) all or part of this thesis or dissertation. I also authorise University Microfilms to use the 350 word abstract of my thesis in Disse1iation Abstract International (this is applicable to doctoral theses only). I have either used no substantial portions of copyright material in my thesis or I have obtained permission to use copyright material; where permission has not been granted I have applied/will apply fora partial restriction of the digital copy of my thesis or disse1iation.1 Date ............... .......�./ �1.�. �J .......................... Authenticity Statement 'I certify that the Library deposit digital copy is a direct equivalent of the final officiallyapproved version of my thesis. No emendation of content has occuned and if there are any minor variations in formatting, they are the result of the conversion to digital format.' Si�ed ... ...... Date .................... I /. � J. � ii THE IMPLICATIONS OF CAPITAL GAINS TAX RATE PREFERENCES Abstract This thesis examines key aspects of one of the more controversial questions in tax policy—what is the appropriate way to tax capital gains? The focus of the thesis is the capital gains tax (CGT) rate and rate preferences. The research is by way of a review of the relevant tax literature on capital gains, followed by qualitative and quantitative studies and recommendations and conclusions. The literature review identifies an absence of empirical evidence on how Australian personal taxpayers respond to CGT rate changes. This significant gap in the knowledge is the primary motivation for this thesis. The qualitative study presents findings from in-depth interviews conducted with 24 CGT experts in Australia, Canada and the United States on issues related to the taxation of capital gains. In particular, it explores the role of CGT preferences. The interview data are compared with relevant tax literature as well as current practices in the three jurisdictions in taxing capital gains. The study establishes that most interviewees do not support CGT rate preferences. Armed with this background, the quantitative study uses regression analysis to estimate the capital gains realisations response in Australia, with the tax rate change of interest being the enactment of the 50% CGT discount in 1999 for personal taxpayers. The elasticity point estimates from the quantitative study support the primary hypothesis: that the 50% CGT discount has caused a decrease in CGT revenue. More specifically, the estimates imply CGT revenue losses. This raises questions about the central rationale for the introduction of the CGT discount—the forecast increase in CGT revenue. The qualitative and quantitative results are drawn on to recommend a tax policy reform to improve the operation of the CGT regime in Australia. Specifically, reinstating taxation of personal capital gains at marginal rates and introducing an annual exempt amount for net capital gains. v THE IMPLICATIONS OF CAPITAL GAINS TAX RATE PREFERENCES Acknowledgements I am indebted to my PhD supervisors, Professor Chris Evans and Dr Youngdeok Lim, who provided invaluable advice and feedback over the six (part time) years that it took to complete this thesis. I am grateful that my supervisors insisted on my completing the research and writing the thesis to a high standard. Their patience afforded me the opportunity to improve (and, in some cases, discard) previous drafts. Obviously, any errors or omissions that remain in the finished work are my own. The time that I spent working on this thesis coincided with the early years of my academic career. I acknowledge that the quality of the supervision of Professor Evans and Dr Lim has greatly influenced my development as a tax researcher as has our collaboration on several conference papers and journal articles. The papers that I published as a sole author also benefited from helpful comments and advice from my supervisors. My sincere thanks to the interviewees (who are not identified by name in this thesis) who agreed to participate in the qualitative study that is the subject of Chapter 4 and to the University of Tasmania for making the in-person interviews possible through the funding provided to support the project. Thanks also to the anonymous reviewers who provided useful feedback on papers related to the thesis that I authored or co- authored and to the editors of the journals in which those articles were published. My thanks to Ellie Gleeson