Taxes on investment income have a major effect on the functioning of capital markets, and the capital gains tax is believed to have a detrimental effect on the ability of capital to finance the most profitable investment opportunities. The capital gains tax has been identified in the past as a significant disincentive to the supply of risk capital for business start-ups and for small and medium-sized enterprises (SME). This type of financing is primarily provided by financially-sophisticated individuals (angels) or venture capitalists who operate outside of a tax-sheltered environment. Their choices are very sensitive to the rate of tax on their investment income. And their income is most likely to come in the form of capital gains rather than dividend income or interest income.
So the burning question is, should capital gains be taxed?