Canada introduced a lifetime capital gains exemption (LCGE) to reduce tax on some realized gains and encourage investment. Because large business and asset gains are concentrated among higher-wealth households, exemptions like this can shift capital-gains tax benefits toward people with more wealth. This set an early pattern of using targeted reliefs within capital-gains systems.
The U.S. Tax Reform Act of 1986 removed a key long-term capital gains preference so that, starting in 1987, many long-term gains were taxed like ordinary income (with a top rate reaching 28%). This reform mattered for inequality debates because preferential rates on gains tend to benefit higher-income households who receive more investment income. It also highlighted a tradeoff between tax neutrality (treating income types similarly) and incentives for saving and investment.
Canada increased the capital gains inclusion rate to two-thirds for gains realized in 1988–1989. Raising the inclusion rate increases the effective tax on realized gains, which can make the tax system more progressive if gains are concentrated at the top. It also can encourage “lock-in,” where investors delay selling to avoid tax.
The UK moved away from a long-standing flat CGT approach and aligned CGT rates more closely with income tax rates. Linking CGT to income tax was intended to reduce opportunities to convert income into gains for tax advantage, an issue often associated with high earners and high-wealth taxpayers. This alignment also raised recurring questions about how to treat inflation in asset gains.
Canada increased the capital gains inclusion rate again, to three-quarters, starting in 1990. A higher inclusion rate generally increases tax paid on realized gains and can raise revenue from high-wealth taxpayers, since they realize a disproportionate share of gains. However, higher rates can also strengthen incentives to defer realizations or use tax planning strategies.
The U.S. Taxpayer Relief Act of 1997 reduced tax rates on long-term capital gains, restoring a clearer preference for gains relative to ordinary income. Supporters argued lower rates reduced distortions and encouraged investment, while critics noted benefits flow mainly to higher-income households. Over time, these distributional concerns became closely tied to discussions of wealth concentration.
The UK replaced further indexation for inflation after April 1998 with “taper relief,” which reduced taxable gains the longer an asset was held (with more generous treatment for business assets). This shifted the CGT system toward rewarding long-term holding and certain types of ownership. Because business-asset gains are often concentrated among higher-wealth households, these design choices also affected who benefited most from CGT reliefs.
After several years at higher inclusion rates, Canada reduced the capital gains inclusion rate to 50% in 2000 (with multiple rates during that year). Lower inclusion rates reduce the effective tax on realized gains, which can increase after-tax returns for investors. Because capital gains are concentrated among higher-wealth households, such cuts can affect after-tax wealth accumulation at the top.
The Jobs and Growth Tax Relief Reconciliation Act of 2003 reduced long-term capital gains rates (for many taxpayers, to a maximum of 15%) for sales after early May 2003. This reinforced the U.S. approach of taxing capital gains at lower rates than wages. Over time, the gap between labor and capital taxation became an important theme in inequality research and tax policy debates.
From April 2008, the UK replaced taper relief with a single 18% CGT rate, simplifying the system. After complaints about impacts on business owners, Entrepreneurs’ Relief was introduced to keep a lower effective rate (10%) on qualifying business disposals up to a lifetime limit. This combination of broad-rate design plus targeted relief showed how governments often balance simplicity, investment incentives, and distribution concerns.
The U.S. Net Investment Income Tax (NIIT) took effect in 2013, applying a 3.8% surtax to certain investment income (including many capital gains) above set income thresholds. The NIIT increased the effective tax rate on gains for higher-income households, who are more likely to have substantial investment income. It became a key element in U.S. debates about whether capital income is taxed “enough” relative to labor income.
The UK reduced its main CGT rates from 18%/28% to 10%/20% starting 6 April 2016, while keeping higher rates for residential property gains and carried interest. Lower CGT rates can increase after-tax returns to asset owners and may change when people choose to sell assets. The carve-outs (like property) show how governments sometimes try to protect revenue or target specific markets while lowering headline rates.
The U.S. Tax Cuts and Jobs Act introduced a longer holding-period requirement (three years) for some partnership “carried interest” gains to qualify for long-term capital gains treatment. Carried interest is a performance-based share of profits for investment managers; critics argue it is closer to labor income than investment income. This change was narrower than broader rate reforms, but it signaled continued policy attention to high-income capital-gains preferences.
The UK reduced the lifetime limit for Entrepreneurs’ Relief (renamed Business Asset Disposal Relief in Finance Act 2020) to £1 million for disposals on or after 11 March 2020. Lowering the limit reduced how much gain could receive the preferential 10% rate, affecting the largest qualifying disposals most. This was an explicit move to narrow a relief widely viewed as benefiting higher-wealth business owners disproportionately.
Canada announced a capital gains inclusion-rate increase effective for dispositions on or after 25 June 2024, raising the inclusion for corporations and trusts to two-thirds and applying a two-tier system for individuals (50% up to an annual threshold, higher above it). This design aimed to concentrate the tax increase on larger realized gains, which are more common among higher-wealth taxpayers. It also illustrated how governments may use thresholds to target distributional goals while limiting impacts on smaller investors.
The UK increased its main CGT rates to 18% and 24% for disposals made on or after 30 October 2024, while also scheduling increases to Business Asset Disposal Relief and Investors’ Relief rates and reducing the Investors’ Relief lifetime limit. These changes reflected renewed emphasis on revenue and fairness, with a focus on reliefs and rates that can disproportionately affect high-wealth taxpayers. The package closed the 1985–2025 story with a clear pivot toward higher effective taxation of gains in one major economy, while international evidence continued to show that capital gains often face lower effective tax rates than wages.
Capital gains tax reforms and implications for wealth inequality (1985–2025)