When Capital Gains Tax is low (or better absent), higher-risk investments in young, growing companies may have an attractive risk-profile and investments may be profitable. Complicated calculations about whether they will be worth it after tax are avoided. Capital allocation is dynamic and efficient: small, growing companies raise capital easily in the stockmarket and investors hope to make a good return on their risk money.
The market is working, and incentivised towards, general prosperity. Tax reduces private investment which is the sole producer of wealth.
Conversely, when CGT is high, the market is seriously distorted. Ordinary stock market investors are incentivised away from risk. Already I find myself considering altering my buying/selling strategy in small holdings I own to suit the tax regime rather than those growing companies needs – which cannot be a good thing.
Investors like me re-allocate capital to safe, lower-return, 'hold for ever if I can' companies because they want to avoid or limit crystallising a gain (in some cases forever) which will be subject to high taxation. Investment subjects become plodders beyond their sell-by date. Capital once directed to worthy, undervalued companies remains there when they no longer need it, while it is denied companies more deserving and which offer a much better return before tax. The economic structure of the country suffers. Equally, money that may be re-cycled into private companies like mine, never quite makes it because it remains stagnant in the markets.