Changing CGT rates will change investment behaviour
This really shouldn’t come as a surprise - changing taxes leads to changes in behaviour. It is, after all, the reason we tax cigarettes so highly, to dissuade people from smokin’ ‘em. The public health lobby is absolutely insistent that raising the price of booze will lead to newspapers being - unusually - written by the sober. Taxes change behaviour.
There is though this current delusion that changing taxes upon investment won’t change investment behaviour. This is not going to be true - taxes change behaviour after all.
Retail investors are piling into the government bond market amid fears that the Labour government will increase the capital gains tax rate on shares in the budget this week.
Why? Because capital gains on gilts are not subject to capital gains tax. A low coupon gilt - of which we’ve got lots and lots as a result of the interest rates of the past decade and a half - currently trades well below par and the return to it is largely the rise in capital value as it approaches maturity. The - low - interest paid is subject to income tax, the capital gain is untaxed. So, rational investors are moving into gilts given the likely coming change in capital gains taxation.
That is, yea even when it’s the rich b’stards deploying their ill-earned loot, taxes change behaviour.
How could it be otherwise?
Thus any change in the taxation of capital gains - or pensions, or inheritance tax, or the like - is going to change investing behaviour.
At which point, well, the government’s declared aim is to increase investment in the British economy. They tell us that we, and they, desire a high investment, high wage, high growth economy. Which indeed we do. Whether they do in fact desire such will become evident when they tell us what those tax changes on investment are going to be.
We’ve already shown that ttax changes behaviour here. So, logically, if they - as opposed to just we - desire that high investment economy they will lower the taxation of the returns to capital. Obviously. There’s not one single person in the country who thinks they will do that of course. But by their actions we shall know them. They’re going to increase the taxation of those returns to capital, from which we can deduce that they wish to reduce investment in the British economy.
Isn’t economic analysis of politics fun?
Of course, there is a really useful solution here. If it’s right that gilts carry no CGT penalty in order to increase investment in gilts then why not simply abolish CGT in the British economy in order to increase investment in the British economy?
Tim Worstall