Great Policy!

The last new announcement from the Conservative Party is to eliminate the taxation of capital gains if the money is moved into another investment within 6 months. I love this policy. Sure, it won't move our poll numbers even higher (as most fiscal conservatives are likely already on our side), but it is just a very good idea. Under the current system it is possible for a rational investor to stay with a worse performing company just to move the capital gains tax to future years if the benefit is higher than the incremental improvement of switching to the company with a higher expected return.

I will show how this is effective with a completely true story. Two weeks ago my dad was facing a dilemma: whether to sell a shares in company A for shares in company B, that he thought would do better. In his decision he had to consider that he would have to immediately pay the capital gains taxes this year. Company B would have to perform better than A by at least the present value of the difference in taxes paid depending on which year he sold his shares. With my father only a few years away from retirement, it is possible that he could be in a lower tax bracket when he sells the security, so it becomes even more beneficial to put off the capital gains tax. So the end result is that investors will not invest purely on which security they think will perform better, as they would in an ideal market. Under this new Conservative policy, the decision becomes obvious - my father would just switch his position to the company he feels will perform the best - as it should be!