More on how CGT is a double tax on business

A reader writes in:

I think your discussion of why CGT is double tax is missing the key element, David Seymour has some good articles on it, as does Eric Crampton.
 
You’ve used the logic of retained earnings.  That is one good reason that CGT is double taxation, but it treats a business as having static value – so the value of the business is basically just retained earnings.  That’s not usually true, unless the value of the business is purely the disposal values (assets plus money at bank).
 
The other end is that the value you’ll pay when buying a business is the discounted present value of future profits.  In other words, if I’m buying a business I’ll pay as much as it’s worth to me in future profits.
 
Those future profits are all taxed.  That taxation reduces the value of the business to me, and therefore reduces how much I’ll pay to buy the business.  Double taxation.
 
Consider an example, a business that is created by a mortgage on your house for $300,000, buying assets and equipment.  It has a projection of $100,000 in profits over the next ten years.  For simplicity I’ll ignore the actual discount rate, and assume that after 10 years the business has no residual value (the government is going to ban the business area it works in – perhaps it’s a fossil fuel business).  The real calculation would need to discount all future profits and assume some growth rate of the business into the future.

What we can see in this simplified example is:
The capital gain in the business is already reduced by the amount of income tax – so income tax is also effectively a tax on the capital gain associated with productive assets
The capital gains tax is hitting inflation as well, which is totally unfair
 
The problem is that this is a complex economic argument that some people don’t follow well – it’s not intuitive that income tax also impacts the capital value of income producing assets.
 
The reality is that the only elements of capital gain that are not currently taxed are those that don’t arise from the future income stream of the asset, i.e. those returning to speculation.  The areas of asset ownership that increase in value through speculation and are untaxed are those of valuable items – art, vintage cars, jewellery, family home (but not rental homes).  The government’s proposed capital gains tax is taxing exactly the wrong asset classes.
 
I think this argument needs to be combined with your discussion of retained capital, to give a full picture of what’s really going on.  I think between double tax on retained capital, double tax on future profits, and taxation on inflation, the real picture of the taxation impact of the CGT is quite different than that the working group gave.