The incentive to convert income into capital gains does not necessarily translate into the ability to do so, and the opportunity for avoidance via this mechanism is asserted far more often than it is demonstrated.
While it is true that capital gains tend to be concentrated at the upper end of the income distribution, so are capital losses. Net capital gains are thus more correctly viewed as compensation for bearing risk than can be left untaxed without compromising efficiency or equity.
Rather than expanding the scope of the capital taxation to include housing assets, a better approach would be to reduce the tax burden on other assets to alleviate the double taxation of saving that occurs through the existing tax system. The introduction of a CGT that exempted owner-occupied housing would only increase the bias in favour of saving via owner-occupied housing.As Tyler Cowen would say, read the whole thing. The overall paper is aimed at a Canadian policy makers, so it is unlikely to get much exposure here in New Zealand, but that is a shame.