All the comments on this thread agree that the proposed tax rule sucks, so they prefer the existing capital gains tax rules. But there is a third option which I think would be the best.
There is clearly a problem with the current capital gains tax rules because it favours people who hold their shares over those that trade frequently, even when the rate of return is the same.
For example, suppose I have two trading strategies: Strategy A buys shares and holds them for 20 years. Strategy B buys shares but trades them once a year for 20 years. Also assume that both strategies produce an annual capital gain of 10%. With the current capital gains rules, Strategy A pays far less tax overall than Strategy B - distorting the market and leading to inefficiencies.
So here's my proposal: make the capital gain percentage a function of the duration of the investment and the average rate of return. For example:
If your investment return was 10% over 1 year your capital gain tax is 15%
If your investment return averaged 10% over 3 years your capital gain tax is 16.23%
If your investment return averaged 10% over 20 years your capital gain tax is 28.21%
If your investment return was 20% over 1 year your tax capital gain is 15%
If your investment return averaged 20% over 3 years your capital gain tax is 15.94%
If your investment return averaged 20% over 20 years your capital gain tax is 21.30%
etc...
Ok, it's not the simplest tax rule, but it would greatly reduce the distortion of the current capital gain tax system.
There is clearly a problem with the current capital gains tax rules because it favours people who hold their shares over those that trade frequently, even when the rate of return is the same.
For example, suppose I have two trading strategies: Strategy A buys shares and holds them for 20 years. Strategy B buys shares but trades them once a year for 20 years. Also assume that both strategies produce an annual capital gain of 10%. With the current capital gains rules, Strategy A pays far less tax overall than Strategy B - distorting the market and leading to inefficiencies.
So here's my proposal: make the capital gain percentage a function of the duration of the investment and the average rate of return. For example:
If your investment return was 10% over 1 year your capital gain tax is 15%
If your investment return averaged 10% over 3 years your capital gain tax is 16.23%
If your investment return averaged 10% over 20 years your capital gain tax is 28.21%
If your investment return was 20% over 1 year your tax capital gain is 15%
If your investment return averaged 20% over 3 years your capital gain tax is 15.94%
If your investment return averaged 20% over 20 years your capital gain tax is 21.30%
etc...
Ok, it's not the simplest tax rule, but it would greatly reduce the distortion of the current capital gain tax system.