This article analyzes the economic impact of taxing capital gains and four options for taxing capital gains in New Zealand. Drawing on their United States and New Zealand tax policymaking experience and the latest international research, the authors argue that the Tax Review 2001 dismissed too readily taxing gains on a realization basis. While acknowledging its glaring deficiencies, they contend that such problems as lock-in and loss limitations appear to be fairly modest based on available empirical evidence. The key point is that there is no perfect way to tax capital gains in a real-world income tax. And, on balance, taxing gains on a realization basis has a number of advantages over accrual taxation, the risk-free return method proposed by the Tax Review 2001, and taxing capital gains in an ad hoc and inconsistent fashion as New Zealand currently does.
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