Democracy 3: Capital Gains Tax

February 12, 2013 | Filed under: democracy3

I’m mulling the possibility of a capital-gains tax policy for Democracy 3. The key thing is to get the effects of such a policy right.

I’m thinking it makes broad sense to link the money raised by the tax to GDP. The better the economy, the more the tax will raise. I also wonder if it’s worth making this a relationship that skews upwards, so when the economy is really poor, CGT brings in nothing, but when it’s really booming, it should bring in a bunch, as clearly the equity market and asset values should be going up.

Regarding it’s effects, I reckon CGT would represent a drag on the economy to some extent. Why invest all my money in a country with a high CGT if it takes a chunk of my profits, rather than a country with no CGT? For the same reason, I assume it should also upset capitalists a bit, and the wealthy especially, who are the only actual voters who will lose out financially from it.

Socialists should love it, as it is a brake on inequality, and effectively a tax on the rich. I think the self-employed 9think small business owners) should dislike it because it potentially cripples the income they take from their business through dividend payments and eventual exit strategy stuff.

In gameplay terms, does this differ that much from corporation tax? possibly not by much, although CGT should possibly be more unpopular with the wealthy and more popular with the socialists, as it is a far more direct attack on what some people would call ‘unearned income’.

Anything I’ve missed? Apart from the existential hell of coming up with an icon that automatically makes people think ‘Capital gains tax’

On a related note, this makes interesting viewing (UK data):

CGT Doesn’t bring in much cash, in the grand scheme of things. Also makes you realize just how trivial the climate change levy is right now.

9 Responses to “Democracy 3: Capital Gains Tax”

  1. Chris Seaton says:

    I think CGT is a good addition. The more to variables to balance, the more the populace vote will vary; which would add to the game-play variety and thus immersion. Right?

    Now I’m piqued to see the icon! Do you think you’ll be posting screens of the new GUI or wanting any feedback from your blog readers, Cliff?

  2. cliffski says:

    It will be at least a month before there is any work done on the GUI, and I’ll definitely be blogging about that extensively when there is something to look at.

  3. Chris Seaton says:

    Awesome. Great to hear!

  4. TheHunter says:

    I wouldn’t think that CGT differed greatly in its impact in comparison to Income Tax, particularly if the CGT rate was comparable / the same. Where things get a bit funny is where there are vastly different rates for the two, or even different rates for different types of returns, and that will skew investment. For example, if CGT on shares is low, but I.T. on bank interest is high, don’t expect people to collect bank interest.

    Your guesses about the relative popularity amongst the rich and poor sound about right, based on my local economy (Australia).

    From an economic perspective, the most interesting thing about taxes is their efficiency and relative deadweight costs. CGT and IT are similar in most respects there. From a political point of view, what is interesting is their relative equity.

    Of course, what would be more interesting is if you were to try and model the impact of increased Land Value Tax (as per Churchill’s Georgist inspired proposal of 1919), which of course has no deadweight costs.

  5. Szymon Kurek says:

    Awesome addition :)

    I can think of 2 additional variables:
    - are the people spending or hoarding? Is the average consumer in debt or does he have some savings? If the country faces (hyper)inflation, nobody in their right mind will have a bank account – they just rush to spend the money on something tangible
    - do they trust the bank system, or do they store money in a sock? If the people think the economy is unstable, they’ll prefer to store money in their home, or – again, if they’re afraid of hyperinflation – buy gold, diamonds and real estate.

  6. Daniel Hardy says:

    Would it be an option that instead of adding various different types of tax into the game, could you have various different “events” that you can tax at different rates, (either % or flat fee) and then have various exemptions? So you could build a tax system that’s as simple or as complicated as you like. A more complicated system means you potentially have more control, but the overall the voters will be more distrusting and cynical the more complex it gets (until they actually see if they are better off).

  7. Kalle says:

    At least in developed countries where farming no longer is a small-scale effort of manual labour as main input, but instead requires heavy capital investments, capital gains tax doesn’t make farmers smile. I would say the impact of both corporate and capital gains tax for farmers should be between the impact on self-employed and capitalists with capital gains having a relatively higher negative farmer impact.

  8. silverado says:

    Hi Cliff, I think you should def. write Paul Krugmann (economist and publicist) an email to discuss it with him. He has exciting ideas.

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