Isn't that how income tax works too? Why should cap gains be different?

Say you buy a house for $1m. You then want to move to an identical house in another location and houses now cost $2m. By moving, on a basic capital gains tax calculation you have a profit of $500k and a tax bill of say $200k. But you don't have $200k and can't move. This not a good situation hence various fixes. That particular problem does not come up with income although there are other problems there.

Tax is messy. I'm reminded of the quote from the 1600s "The art of taxation consists in so plucking the goose as to procure the largest quantity of feathers with the least possible amount of hissing." The above problem causes hissing.

So provide an exemption for primary residences. There is a similar concern with stock sales causing tax payment, but in that case it's an incentive for longer term investment. You goose quote is really awesome.

On a related note, I think we need to stop providing incentives for housing prices to go up. Municipalities could put caps on the percentage of value they'll enforce a lean on. This would reduce housing costs to the benefit of people at the bottom.

This is a problem for all assets, not just primary residences.

> I think we need to stop providing incentives for housing prices to go up.

While true, the main such incentive historically is inflation: housing prices have been growing at about the rate of inflation in the long run, averaged over the US.

Ideally, capital gains tax should be charged on gains above the rate of inflation.

So that still assumes that saving is risk-free (maybe) and the discount rate people apply to consumption is 0, right? The latter just doesn't match reality.

But it would definitely be a step up from where we are now, in theory. In practice, measuring inflation is an interesting exercise; there are multiple measures that differ quite a bit once your timescale is "decades" as it can easily be for savings and housing. And yrs, I know I said "the rate of inflation" -- I forget which measure those studies used. For housing specifically, one could use whichever inflation measure best matched housing prices in the past, I guess...

> But you don't have $200k and can't move. This not a good situation hence various fixes.

So dont move or move when you can afford to pay the tax.

Why did the value of the neighbourhood increase, its because society aka the police keeping the area safe, the people who maintain all the infrastructure/roads etc, who is going to pay for all that?

"Don't move" is terrible public policy. For one thing, people change jobs. Two families that end up living and working on opposite sides of town should be able to swap houses to keep the commutes sane. When they can't, congestion gets worse, and energy and infrastructure demands grow. Or worse, people stay in suboptimal jobs due to the difficulty of moving, suppressing productivity. Empty nesters hoard the family-sized houses, making things impossible for young couples. Etc, etc.

>move when you can afford to pay the tax

Why could they afford to pay the tax? Their income hasn't changed.

>Why did the value of the neighbourhood increase

Usually this kind of meteoric rise in property value happens due to changes in demand, i.e. your city suddenly becomes a tech employment center, or the fashion suddenly shifts from suburban to urban.

>its because society aka the police keeping the area safe, the people who maintain all the infrastructure/roads etc,

Nope. Typically all those things were there when you bought in, so would not explain the delta between your previous and current home value. And if the quality of your local institutions got 2x better during your stay, it's likely you had a hand in building them.

>who is going to pay for all that?

Excuse me, what? No place in America has capital gains tax on primary residences; do you imagine that we don't have police or roads? We'll pay for it like we've always paid for it: a combination of property taxes, user fees, and state income taxes remitted to the municipalities.

Do you have any data which gives the number of people who swap houses to keep the commutes sane?

Long commutes can be reduced if you have a good public transport which again depends on tax.

> Usually this kind of meteoric rise in property value happens due to changes in demand,

which brings us back to the same points which I raised, its because of the society the demand rises, demand is not going to increase in high crime, poor infrastructure area.

> Excuse me, what?

What part did you not understand?

How is the $500k profit calculated?

Inflation. Inflation is one of the two reasons capital gains should be different. You can make a large profit in nominal terms while making a real loss if inflation is high enough. This is not a risk with non-capital gains income.

The real reason capital gains taxes are a bad idea is that they discourage investment and we want more of that because it’s how we increase our productive capacity and get more of what we really want, consumption.

We should abolish income and capital gains taxes altogether and tax consumption. Encouraging investment by ceasing to tax it will lead to higher production and consumption in the long run.

Income tax is based on income earned, capital gains is based on a sale of a asset. There is definitely a difference.

> Income tax is based on income earned, capital gains is based on a sale of a asset.

but couldn't you claim that income is sale of personal time (an infinitely valuable, and non-renewable asset)?

If your personal time is infinitely valuable to yourself, why do you sell for way below that?

Yes, but that doesn't mean they should be taxed differently. You need more justification.