<p>Shares, and many other financial instruments as well, are financial assets <a href="https://www.investopedia.com/terms/f/financialasset.asp" rel="nofollow noreferrer"> <em>assets</em></a>, through which people save <strong>not</strong> <em><a href="https://www.britannica.com/topic/consumption" rel="nofollow noreferrer">consumption</a> of <a href="https://examples.yourdictionary.com/goods-services-simple-examples-economics" rel="nofollow noreferrer">goods and services</a></em>. Consequently, neither GST (<strong>goods and services</strong> tax) or value added tax (which is in economics a type of <em>consumption</em> tax) can apply to stocks or many other financial instruments as they do not represent consumption of either goods nor services. Hence prima facie there is no reason why consumption taxes should apply to things that are neither consumption or goods or services in the first place. That is like asking why houses are exempt from labor taxes... well its because they are capital not labor.</p>
<p>For example, if you pay someone to make trades for you (and hence someone to provide you financial service), you will generally be required to pay VAT or GST on that (unless particular country decided to exempt it for whatever political or legal reason - which is beyond the professional competency of an economist to comment on).</p>
<hr />
<p>Response to edit:</p>
<p>It is feasible to tax financial assets but this would be considered wealth taxation (completely different type of taxation than consumption taxes). Taxing wealth is feasible in a sense government can pass legislation to actually do it, but from economic perspective it is often considered undesirable for its negative impact on the economy.</p>
<p>The literature shows that optimal top marginal wealth taxes, even in case of Rawlsian social utility function (the most redistributive social function there is), are somewhere in range 0-10% (see <a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1468-0262.2005.00630.x?casa_token=K4LCPDGfCbQAAAAA:bdnkPEyRKeZXVTMiEtUk-3wO5rz32k6hUYXuoY-qqkoHKgB5WDzmwmuMZmYhc1DcHCU_nTUaoAkmUjE" rel="nofollow noreferrer">Kocherlakota 2005</a>; <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3403782" rel="nofollow noreferrer">Fama 2019</a>; <a href="https://www.brookings.edu/wp-content/uploads/2019/09/Saez-Zucman_conference-draft.pdf" rel="nofollow noreferrer">Zucman and Saez 2019</a> or <a href="http://larrysummers.com/2019/04/01/fair-comprehensive-tax-reform-is-the-right-path-forward/" rel="nofollow noreferrer">this</a> article by Summers) or discussion in the famous Mirrlees Review: Dimensions of Tax Design). Also, note the consensus seems to still be closer to the zero result and only very few scholars would go as high as 10%.</p>
<p>The above being said governments typically do not conduct science based policies. Often politicians will ignore even recommendation of their own analysts when it comes to the design of tax policy. Consequently, it is beyond scope of economic profession to tell you why politicians do not base all their laws on best published science/state of the art models or why they do tax one thing but not another (for example, in the Netherlands where I live for long time food for hamsters and bunnies was taxed at different rate even though they are perfect substitutes - which is completely absurd from any economic perspective, yet that is what the government legislated).</p>

CC BY-SA 4.0
2021-02-11T13:07:22.470Z
One small addendum about the practicality. Financial market trading is not just equities, it includes fixed income. Fixed income is lending. A bank deposit is a de facto loan to a bank. If such a tax were consistently applied, it would apply to every bank transfer. This would generate considerable political resistance.
Brian Romanchuk
CC BY-SA 4.0
2021-02-11T13:11:53.430Z
@BrianRomanchuk in the case you mention that should fall under income tax - as that would be considered capital income. It would not qualify as a consumption of goods and services (at least not under standard econ definition). Normally, the fees you get charged by your bank that would count as fees for services would be subjected to VAT. Otherwise, your argument about taxes not being consistently applied is correct but that is political question as mentioned above.
1muflon1
CC BY-SA 4.0
2021-02-11T13:27:29.563Z
@BrianRomanchuk if there was GST on the bank deposit (the sale of a loan) then wouldn't there also be a GST credit on the withdrawal (the repurchase of a loan) such that only the interest would ultimately incur net GST?
benjimin
CC BY-SA 4.0
2021-02-11T13:37:47.893Z
To respond to two comments. 1) If we apply a tax on face value of bonds, we need to apply a tax on face value of deposits. That’s not an income tax. 2) In the case if VAT, yes, consistency would indicate that one can deduct tax paid versus taxes accrued.
Brian Romanchuk
CC BY-SA 4.0
2021-02-11T13:40:22.193Z
@BrianRomanchuk oh I thought you meant to apply it on income from those securities. But then it would be again a *wealth* tax - not tax on consumption of goods and services - again I dont think that in any economic literature, whether mainstream or otherwise - purchase and sale of financial asset was considered consumption of goods and services. If you have some example of that being done in literature could you please provide it?
1muflon1
CC BY-SA 4.0
2021-02-11T13:43:29.113Z
The question asks why a VAT is not applied to financial assets? I just pointed out an extremely important issue that arises if one attempted to make such an extension to the VAT in a consistent manner. No country does this, since it would have a lot of political if not economic problems.
Brian Romanchuk
CC BY-SA 4.0
2021-02-11T13:45:34.687Z
@BrianRomanchuk oh ok, but then what you are addressing is rather question why those assets are not taxed. Because when we talk about VAT specifically that is a type of consumption tax - that is why labor that also adds value is not taxed by VAT but by income tax
1muflon1
CC BY-SA 4.0
2021-02-11T13:51:08.747Z
@1muflon1 is this the kind of example you mean: that sales of capital assets incur GST [in Australia](https://www.ato.gov.au/Business/GST/In-detail/Rules-for-specific-transactions/Business-asset-transactions/GST-and-the-disposal-of-capital-assets/)?
benjimin
CC BY-SA 4.0
2021-02-11T13:53:38.493Z
@benjimin no - motor vehicles etc purchased by final consumers are considered consumption in the literature (even though from accounting definition- which by the way is not necessary the same as economic definition) they are also assets, but financial assets - to my best knowledge were never in economic literature considered consumption - I edited my answer to also make it more clearer
1muflon1
CC BY-SA 4.0
2021-02-11T14:43:00.830Z
@1muflon1 I also edited my question for clarity.
benjimin
CC BY-SA 4.0
2021-02-11T14:56:20.937Z
@benjimin I edited my question to further provide answer to the new part of the question
1muflon1
CC BY-SA 4.0
2021-02-11T21:51:26.610Z
How would a VAT (aka. GST) on _transactions_ of shares/bonds be equivalent to a wealth tax rather than to a **capital gains** tax? A wealth tax would still be incurred if the assets did not change hands, and wouldn't provide for input-credits..
benjimin
CC BY-SA 4.0
2021-02-11T22:06:00.147Z
@benjimin capital gains tax require you to make some profit on the trading and its a sort of income tax (it taxes extra income you get from trading). You did not mentioned in your question it is only supposed to apply to profit.
1muflon1
CC BY-SA 4.0
2021-02-11T22:07:39.053Z
@benjimin can you maybe first decide exactly what sort of tax you have in mind because the details here are important
1muflon1
CC BY-SA 4.0
2021-02-12T00:18:30.227Z
@1muflon1 my question is explicitly referring to the type of tax that already exists in Australia and is officially named "GST". (I think it is the same in Canada; I think some other jurisdictions may call it other names such as "VAT". I don't know what nomenclature you prefer.) I'm asking why shares in a company are generally exempt. (Fresh groceries are also exempt to reduce regressivity, whereas land and machinery are apparently not.) I don't understand why your answer implies it would be effectively equivalent to an annual _wealth_ tax rather than to a capital gains tax.
benjimin
CC BY-SA 4.0
2021-02-12T00:23:27.143Z
@benjimin answer to your question simply is that GST is a consumption tax and financial instruments are not consumption- again it’s like asking why goods are not taxed by land tax. Next, what you propose cannot be capital gain tax because it would be paid even if there is no profit from the taxation. Capital gains tax is tax levied solely on capital gains, eg you might make infinite amount of transactions buying stocks left end right as long as you don’t make profit out of it you would pay 0 capital gains tax because you have 0 capital gains
1muflon1
CC BY-SA 4.0
2021-02-12T00:38:35.563Z
@1muflon1 you might need to google GST.. In Australia, land _is_ subject to GST (do you deem that to be consumption?). You can have infinite transactions and as long as you don't make a profit you would pay no GST (because the GST liabilities would be offset by the GST credits). Shares in a real estate property already incur GST so what difference would it make to the economy if shares in a company were not exempt?
benjimin
CC BY-SA 4.0
2021-02-12T00:46:35.903Z
@benjimin maybe you should google it first... literally on the government website of Australia it’s mentioned it’s tax on consumption. Consumption means use of goods or services for final use, yes land when it’s used for final use is consumption but land tax is tax on investing and owning land - that’s like saying this consumption tax applies to labor because you tax services that’s absurd - you can check it in any 101 public econ textbook instead of stubbornly insisting it is not consump. tax. If you are not willing to accept the taxonomy used in econ lit. then  no point in any discussion
1muflon1
CC BY-SA 4.0
2021-02-12T00:52:50.290Z
@benjimin like literally just look at wikipedia page for consumption tax https://en.wikipedia.org/wiki/Consumption_tax#Value-added_tax. "In Australia, Canada, India, New Zealand and Singapore, it is instead called a "Goods and Services Tax."  Seriously, google it first before recommending someone else to google it. Again, if you are not willing to accept that consumption taxes are levied on consumption and not investment there is no point in further discussion - that does not mean there should not be investment/wealth taxes but consumption taxes are completely different type of tax
1muflon1
CC BY-SA 4.0
2021-02-12T01:03:40.353Z
@1muflon1 isn't capital gains tax a _"completely different type of taxation than"_ an annual wealth tax, according to literature? (Maybe your answer could clarify the connection of wealth tax to the question.) I'm also not sure what you mean by the _"final"_ use of land?
benjimin
CC BY-SA 4.0
2021-02-12T01:07:35.840Z
@benjimin yes capital gains tax is different from wealth tax but what you describe in your question is not capital gains tax. Capital gains tax would be an example of income tax. GST as Wikipedia and Australian government states is consumption tax. What you propose above is god knows what but it sounds most closely related to wealth tax.
1muflon1
CC BY-SA 4.0
2021-02-12T01:12:45.190Z
@benjimin look maybe an analogy will help you to understand- as in any science economics has taxonomy. For example, in biology some animals will be classified as birds, some as mammals some as fish etc. the same way in economics some taxes are consumption taxes some income taxes and so on - your question is basically equivalent of asking why dolphins are not included in some biology treatise on fish - well answer is dolphins are mammals not fish... in the same way GST tax is a *consumption tax* so buying stocks which is not consumption by definition does not apply.
1muflon1
CC BY-SA 4.0
2021-02-12T01:16:52.683Z
Let us [continue this discussion in chat](https://chat.stackexchange.com/rooms/119648/discussion-between-benjimin-and-1muflon1).
benjimin
CC BY-SA 4.0
2021-02-12T01:17:53.930Z
Comments are not for extended discussion; this conversation has been [moved to chat](https://chat.stackexchange.com/rooms/119649/discussion-on-answer-by-1muflon1-why-are-shares-exempt-from-gst).
1muflon1
CC BY-SA 4.0
2021-02-11T13:01:44.300Z
2021-02-11T15:01:18.360Z
2021-02-11T15:01:18.360Z
1muflon1
<p>Why is the financial trading sector exempted from consumption taxes?</p>
<p>For example, shares seem to be exempt from GST in both Australia and Canada. What is the intention behind this? Is it common for jurisdictions to have a VAT or sales tax that also covers or excludes financial instruments and supplies?</p>
<p>Semantics aside, is there something that would make it infeasible for some kind of sales tax to be levied at an identical rate on <em>every</em> transaction in the economy?</p>

<taxation><financial-markets><nonexpert>
Why are shares exempt from GST?
benjimin
# Why are shares exempt from GST?

(Asked by: username_0 on 2021-02-11)

Why is the financial trading sector exempted from consumption taxes?

For example, shares seem to be exempt from GST in both Australia and Canada. What is the intention behind this? Is it common for jurisdictions to have a VAT or sales tax that also covers or excludes financial instruments and supplies?

Semantics aside, is there something that would make it infeasible for some kind of sales tax to be levied at an identical rate on *every* transaction in the economy?

**Tags:** taxation, financial-markets, nonexpert


---

## 1 answers

### Answer by username_1 on 2021-02-11. Score: 1

Shares, and many other financial instruments as well, are financial assets  [*assets*](https://www.investopedia.com/terms/f/financialasset.asp), through which people save **not** *[consumption](https://www.britannica.com/topic/consumption) of [goods and services](https://examples.yourdictionary.com/goods-services-simple-examples-economics)*. Consequently, neither GST (**goods and services** tax) or value added tax (which is in economics a type of *consumption* tax) can apply to stocks or many other financial instruments as they do not represent consumption of either goods nor services. Hence prima facie there is no reason why consumption taxes should apply to things that are neither consumption or goods or services in the first place. That is like asking why houses are exempt from labor taxes... well its because they are capital not labor.

For example, if you pay someone to make trades for you (and hence someone to provide you financial service), you will generally be required to pay VAT or GST on that (unless particular country decided to exempt it for whatever political or legal reason - which is beyond the professional competency of an economist to comment on).

---

Response to edit:

It is feasible to tax financial assets but this would be considered wealth taxation (completely different type of taxation than consumption taxes). Taxing wealth is feasible in a sense government can pass legislation to actually do it, but from economic perspective it is often considered undesirable for its negative impact on the economy.

The literature shows that optimal top marginal wealth taxes, even in case of Rawlsian social utility function (the most redistributive social function there is), are somewhere in range 0-10% (see [Kocherlakota 2005](https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1468-0262.2005.00630.x?casa_token=K4LCPDGfCbQAAAAA:bdnkPEyRKeZXVTMiEtUk-3wO5rz32k6hUYXuoY-qqkoHKgB5WDzmwmuMZmYhc1DcHCU_nTUaoAkmUjE); [Fama 2019](https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3403782); [Zucman and Saez 2019](https://www.brookings.edu/wp-content/uploads/2019/09/Saez-Zucman_conference-draft.pdf) or [this](http://larrysummers.com/2019/04/01/fair-comprehensive-tax-reform-is-the-right-path-forward/) article by Summers) or discussion in the famous Mirrlees Review: Dimensions of Tax Design). Also, note the consensus seems to still be closer to the zero result and only very few scholars would go as high as 10%.

The above being said governments typically do not conduct science based policies. Often politicians will ignore even recommendation of their own analysts when it comes to the design of tax policy. Consequently, it is beyond scope of economic profession to tell you why politicians do not base all their laws on best published science/state of the art models or why they do tax one thing but not another (for example, in the Netherlands where I live for long time food for hamsters and bunnies was taxed at different rate even though they are perfect substitutes - which is completely absurd from any economic perspective, yet that is what the government legislated).

> **Comments:**
> **username_2**: One small addendum about the practicality. Financial market trading is not just equities, it includes fixed income. Fixed income is lending. A bank deposit is a de facto loan to a bank. If such a tax were consistently applied, it would apply to every bank transfer. This would generate considerable political resistance.  
> **username_1**: @username_2 in the case you mention that should fall under income tax - as that would be considered capital income. It would not qualify as a consumption of goods and services (at least not under standard econ definition). Normally, the fees you get charged by your bank that would count as fees for services would be subjected to VAT. Otherwise, your argument about taxes not being consistently applied is correct but that is political question as mentioned above.  
> **username_0**: @username_2 if there was GST on the bank deposit (the sale of a loan) then wouldn't there also be a GST credit on the withdrawal (the repurchase of a loan) such that only the interest would ultimately incur net GST?  
> **username_2**: To respond to two comments. 1) If we apply a tax on face value of bonds, we need to apply a tax on face value of deposits. That’s not an income tax. 2) In the case if VAT, yes, consistency would indicate that one can deduct tax paid versus taxes accrued.  
> **username_1**: @username_2 oh I thought you meant to apply it on income from those securities. But then it would be again a *wealth* tax - not tax on consumption of goods and services - again I dont think that in any economic literature, whether mainstream or otherwise - purchase and sale of financial asset was considered consumption of goods and services. If you have some example of that being done in literature could you please provide it?  
> **username_2**: The question asks why a VAT is not applied to financial assets? I just pointed out an extremely important issue that arises if one attempted to make such an extension to the VAT in a consistent manner. No country does this, since it would have a lot of political if not economic problems.  
> **username_1**: @username_2 oh ok, but then what you are addressing is rather question why those assets are not taxed. Because when we talk about VAT specifically that is a type of consumption tax - that is why labor that also adds value is not taxed by VAT but by income tax  
> **username_0**: @username_1 is this the kind of example you mean: that sales of capital assets incur GST [in Australia](https://www.ato.gov.au/Business/GST/In-detail/Rules-for-specific-transactions/Business-asset-transactions/GST-and-the-disposal-of-capital-assets/)?  
> **username_1**: @username_0 no - motor vehicles etc purchased by final consumers are considered consumption in the literature (even though from accounting definition- which by the way is not necessary the same as economic definition) they are also assets, but financial assets - to my best knowledge were never in economic literature considered consumption - I edited my answer to also make it more clearer  
> **username_0**: @username_1 I also edited my question for clarity.  
> **username_1**: @username_0 I edited my question to further provide answer to the new part of the question  
> **username_0**: How would a VAT (aka. GST) on _transactions_ of shares/bonds be equivalent to a wealth tax rather than to a **capital gains** tax? A wealth tax would still be incurred if the assets did not change hands, and wouldn't provide for input-credits..  
> **username_1**: @username_0 capital gains tax require you to make some profit on the trading and its a sort of income tax (it taxes extra income you get from trading). You did not mentioned in your question it is only supposed to apply to profit.  
> **username_1**: @username_0 can you maybe first decide exactly what sort of tax you have in mind because the details here are important  
> **username_0**: @username_1 my question is explicitly referring to the type of tax that already exists in Australia and is officially named "GST". (I think it is the same in Canada; I think some other jurisdictions may call it other names such as "VAT". I don't know what nomenclature you prefer.) I'm asking why shares in a company are generally exempt. (Fresh groceries are also exempt to reduce regressivity, whereas land and machinery are apparently not.) I don't understand why your answer implies it would be effectively equivalent to an annual _wealth_ tax rather than to a capital gains tax.  
> **username_1**: @username_0 answer to your question simply is that GST is a consumption tax and financial instruments are not consumption- again it’s like asking why goods are not taxed by land tax. Next, what you propose cannot be capital gain tax because it would be paid even if there is no profit from the taxation. Capital gains tax is tax levied solely on capital gains, eg you might make infinite amount of transactions buying stocks left end right as long as you don’t make profit out of it you would pay 0 capital gains tax because you have 0 capital gains  
> **username_0**: @username_1 you might need to google GST.. In Australia, land _is_ subject to GST (do you deem that to be consumption?). You can have infinite transactions and as long as you don't make a profit you would pay no GST (because the GST liabilities would be offset by the GST credits). Shares in a real estate property already incur GST so what difference would it make to the economy if shares in a company were not exempt?  
> **username_1**: @username_0 maybe you should google it first... literally on the government website of Australia it’s mentioned it’s tax on consumption. Consumption means use of goods or services for final use, yes land when it’s used for final use is consumption but land tax is tax on investing and owning land - that’s like saying this consumption tax applies to labor because you tax services that’s absurd - you can check it in any 101 public econ textbook instead of stubbornly insisting it is not consump. tax. If you are not willing to accept the taxonomy used in econ lit. then  no point in any discussion  
> **username_1**: @username_0 like literally just look at wikipedia page for consumption tax https://en.wikipedia.org/wiki/Consumption_tax#Value-added_tax. "In Australia, Canada, India, New Zealand and Singapore, it is instead called a "Goods and Services Tax."  Seriously, google it first before recommending someone else to google it. Again, if you are not willing to accept that consumption taxes are levied on consumption and not investment there is no point in further discussion - that does not mean there should not be investment/wealth taxes but consumption taxes are completely different type of tax  
> **username_0**: @username_1 isn't capital gains tax a _"completely different type of taxation than"_ an annual wealth tax, according to literature? (Maybe your answer could clarify the connection of wealth tax to the question.) I'm also not sure what you mean by the _"final"_ use of land?  
> **username_1**: @username_0 yes capital gains tax is different from wealth tax but what you describe in your question is not capital gains tax. Capital gains tax would be an example of income tax. GST as Wikipedia and Australian government states is consumption tax. What you propose above is god knows what but it sounds most closely related to wealth tax.  
> **username_1**: @username_0 look maybe an analogy will help you to understand- as in any science economics has taxonomy. For example, in biology some animals will be classified as birds, some as mammals some as fish etc. the same way in economics some taxes are consumption taxes some income taxes and so on - your question is basically equivalent of asking why dolphins are not included in some biology treatise on fish - well answer is dolphins are mammals not fish... in the same way GST tax is a *consumption tax* so buying stocks which is not consumption by definition does not apply.  
> **username_0**: Let us [continue this discussion in chat](https://chat.stackexchange.com/rooms/119648/discussion-between-username_0-and-username_1).  
> **username_1**: Comments are not for extended discussion; this conversation has been [moved to chat](https://chat.stackexchange.com/rooms/119649/discussion-on-answer-by-username_1-why-are-shares-exempt-from-gst).  

---

