Whether or not it is proper to do so, governments have long been tempted to use their powers to stamp out vices. And by vices I mean, as Lysander Spooner put it: “those acts by which a man harms himself or his property.” Vices differ from crimes which “are those acts by which one man harms the person or property of another.”
In some cases, such as the use of heroin, governments are so opposed to the self-inflicted harm that they ban the vice completely. In other cases they impose what are referred to as “sin taxes”. The idea behind such taxes is rather simple and the logic is quite accurate. For instance, when it comes to smoking and drinking, the government decides that such “sinful” actions should be discouraged but it is not prepared to try and ban the activities completely. So to reduce the number of smokers and drinkers the politicians impose higher and higher taxes on the substances the people are using.
Each year a new budget is announced and invariably politicians seek more and more revenue through these sin taxes. So the cost of smoking or drinking continues to rise. Of course they run into a problem as well. At some point the level of taxation starts to take on the characteristics of prohibition and consumers begin responding as if their favourite vice had been banned: this means high levels of cigarette smuggling and alcohol bootlegging.
Most governments try to walk a fine line. They use the taxes to discourage smoking and drinking but try to avoid creating incentives for smuggling or bootlegging. However, everyone recognises that the taxes are intended to discourage the vice that is being targeted, and that they have a certain measure of success. These economic disincentives are used everywhere. For instance, a fine for speeding serves the same function as a tax. It raises the cost of unwanted behaviour thus reducing the levels of such behaviour. The logic is faultless given the premises involved.
But with that in mind we have to ask ourselves what the function of a capital gains tax is supposed to be? If we all know that taxes on smoking or drinking are a disincentive to indulge in such activities, what function does a capital gains tax have? Is it not a disincentive to investment? Surely investors react in the same way as smokers. If their activity is taxed they will do less of it. A tax on capital therefore discourages investment in the same way a tax on tobacco discourages smoking. Government may wish to reconsider the tax if it accepts the logic of the analogy.
Source: Jim Peron is a freelance researcher and writer. This article may be republished without prior consent but with acknowledgement. The patrons, council and members of the Foundation do not necessarily agree with the views expressed in the article.
