The crucial issue about the capital gains tax is not its revenue-raising capacity. I think it is a very poor tax for that purpose. Indeed, its major impact is to impede
entrepreneurial activity and capital formation. While all taxes impede economic growth to one extent or another, the capital gains tax is at the far end of the scale.
I argued that the appropriate capital gains tax rate was zero.
—Alan Greenspan, testimony before the US Senate Banking Committee, 25 February
Anticipating and assessing the potential sources of government failure is essential in designing any public policy. As Mintrom notes, ‘instances can arise in which government actions – while at first seeming desirable- can produce results that are not better, and potentially worse, than the results produced [ by current policies]’.  While it is impossible to anticipate every potential unintended consequence, the fact that CGT has been implemented in so many countries, not least of all Australia, means that scholars have already isolated potential problems in its implementation. Table 3 highlights these potential unintended consequences, looks at their likelihood of occurrence and offers suggestion for risk mitigation. The discussion section that follows goes into more depth about potential problems.
“The tax system already creates a number of challenges; there is already a significant amount of money spent avoiding, and policing, the boundaries between revenue and capital.”
A realised capital gains tax on corporate income could potentially lead to an element of double taxation. For example, for income taxed at the company level, there could be an element of double taxation if firms had not distributed this income and if the retained earnings were reflected in higher share prices and gains in shares were being taxed on sale. If this were the case, then the implementation of a CGT could potentially undermine the governmental goals of equity and fairness mentioned in the introduction. However, double taxation would not be a significant problem in New Zealand because of the imputation of tax credits to shareholders which could potentially be carried forward under any CGT.
It is certainly true that a capital gains tax would be challenging to administer, especially at first.  This report is wary of introducing too much complexity in the tax system, as that would undermine one of the key goals of the introduction of a CGT: improving economic efficiency. However, this is somewhat of a red herring. If capital gains were taxed, then this boundary would be largely destroyed. If capital taxes were to be taxed at a lower rate, as the Labour Party has proposed, then policing this boundary would still matter somewhat, but there would be far less incentive for taxpayers to avoid and would thus improve voluntary compliance with the tax.
In fact, the implementation of a comprehensive capital gains tax may in fact be less complex than the current tax regime. As Burman and White have argued, ‘a rational and consistent definition of capital gains could be easier for taxpayers to comprehend and comply with.’ Therefore, while there would be some added administration complexity and cost to begin with, this report judges that a CGT would be a net bonus for the tax administration as it would strengthen the integrity of the tax system and reduce incentives for finding tax shelters in capital gain.
Reducing entrepreneurial behaviour
Some argue that capital gains taxation reduces the incentives for entrepreneurial behaviour, often inherently risky and to an extent speculative, something that any modern economy needs. The Centre for Independent Studies, an Australian think-tank, notes, for example, that:
“Speculation is fundamental to the operation of a market economy. Capital markets need entrepreneurs to direct capital into more highly valued uses. This process is subject to considerable uncertainty and is often risky. As part of the overall division of labour in an economy, entrepreneurs specialize in bearing these risks and uncertainties. Capital gains are the pay-off to this specialization, while the price of entrepreneurial error is capital loss. Speculation is inseparable from the experimentation and innovation that drives capital allocation, new business formation, technological change, long-run economic growth, and growth in real wages […] entrepreneurial speculation is potentially highly productive and should be rewarded by the tax system, not penalised.’ 
However, one must note that increasing the equity in the tax system is more important than keeping opportunities for highly speculative gain. It is this very type of highly speculative gain that undermines the equity and progressivity of the tax system, and thus must be reduced.
Arguably the most salient critique of capital gains taxation is that it ends up creating a highly inefficient lock-in effect whereby people withhold selling their assets. Capital gains tax is, almost by definition, voluntary for most taxpayers as it can always be postponed. This can be particularly acute if assets held until an owner’s death are exempt from CGT. How much lock-in matters to the outcome of the implementation of a CGT depends upon the CGT’s aims. While it is true that lock-in is an inefficient distortion of markets, so too is GST. GST, like CGT, is, in a sense, voluntary, and yet we consider consumption taxes to be the most efficient of all. Therefore, if we avoid using CGT as simply a way of increasing revenue, and instead view it as part of a more robust tax system, then the idea of people not paying the tax straight away as being a bad thing begins to fade.
Gains from inflation
One of the key equity concerns in the implementation of a capital gains tax is how to treat gains from inflation. In an unindexed tax system, inflation reduces the real rate of return. This could possibly by reduced by indexing the gains from a capital asset based upon the prices at the introduction of the CGT.
 Mintrom, Contemporary Policy Analysis, 191.
 Inland Revenue Department and New Zealand Treasury, “The Taxation of Capital Gains Background Paper for Session 3 of the Victoria University of Wellington Tax Working Group,” 40.
 Victoria University of Wellington, “Tax Working Group”.
 Burman and David I. White, “Taxing Capital Gains in New Zealand: Assessment and Recommendations,”21.
 Centre for Independent Studies, “Reforming Capital Gains Tax: The Myths and Reality behind Australia’s Most Misunderstood Tax,” http://www.cis.org.au/publications/policy-monographs/article/897-reforming-capital-gains-tax-the-myths-and-reality-behind-australias-most-misunderstood-tax (accessed 20 October, 2011), 12.
 Matt Benge, “Capital Gains and Reform of the Tax Base,” in Taxation Towards 2000, eds. John Head and Richard Krever, (Sydney, Australia: Australian Tax Research Foundation, 1997).
 Burman and White offer the following example: “suppose a bond pays 8% interest of which 4% represents a real return and 4% represents inflation. At a 25% tax rate, the after-tax nominal return is reduced to 6%, or a 2% real after-tax return. The 25% statutory tax rate becomes a 50% effective tax rate.” Burman and White, “Taxing Capital Gains in New Zealand: Assessment and Recommendations,”11.