Equalising Capital Gains Tax means abolishing Corporation Tax - an excellent idea

We’re told, in The Observer, this:

There is an overwhelming economic and ethical case for higher taxes on wealth and for taxing capital gains at the same rate as income, not least the soaring levels of wealth inequality in Britain.

We’re really, really, uncertain that there are soaring levels of wealth inequality in Britain. The usual calculations don’t take account of lifetime effects and given that the main sources of household wealth are pensions and housing equity that makes them all an entire nonsense.

We’re also really very certain that any capital gains tax rate has to have some allowance for purely inflationary gains. That can be through a different rate or through indexation. We’re then deeply uncertain that adding in indexation to an equalised rate would increase the revenue collected. The current system of a lower rate without indexation might collect around the same amount that is - that was the claim when the rate was lowered and indexation abolished after all.

But there’s another issue here. Corporation tax.

Now, yes, it’s true that it’s the corporation that pays that tax. But we all know that the incidence of the tax is not upon the corporation for corporations are not natural people and all tax makes the wallet of some natural person - some real live human being - lighter. The study of tax incidence is whose wallet gets lighter from this specific tax?

Estimates for the UK say that perhaps 50% of the incidence is upon shareholders, 50% upon all workers in the economy that now has lower levels of investment as a result of the tax upon investing successfully. That’s a rather free market, classically liberal, estimate, put forward by, well, people like us actually. Rather more leftish estimates are of 20%, 30% on the workers, the rest on the shareholders. Real proper lefties will shriek that of course the b’stard capitalists pay it all.

We can note that the work of Joe Stiglitz and Tony Atkinson points out that the incidence of a tax can be over 100% - the economic costs of the tax in burdens bourne are higher than the revenue raised by the tax. We can also point out that we acknowledge this issue in our taxation of dividends. Corporation tax is collected at the corporate level, it is that tax plus the dividend tax which approximates to the standard income tax levels for the gross annual income received.

OK, so corporation tax is paid by shareholders. Therefore if we are to tax gains from shares equally to income from labour then we must have a capital gains tax rate which allows for that tax already captured at the corporate level.

The only alternative to this is to abolish corporation tax. Then we can indeed have dividend and CGT rates (with CGT, we’d still need that indexation) the same as those upon labour incomes.

Note what we’ve done here. We’ve not made any of the deeper economic arguments about not taxing investment because we prefer capitalists. Nor because investment’s a good thing that makes the future richer. Nor are we allowing that idiot mistake of thinking that government will invest better than people deploying their own money - the argument for taxing the capitalists to invest.

We’re simply taking people at their word. They want equal rates for income tax and capital gains. OK - but there’s already a tax upon corporate incomes. If we want equal headline rates then we’ve got to abolish that other tax first.

Now, we do think that abolishing corporation tax is an excellent idea for all the usual deadweight reasons. But we’re considerably doubtful that doing that plus equalising the dividend and CGT rates is going to be revenue enhancing. In fact, we’d insist rather strongly that it wouldn't be.

And here’s the thing. How many of those making this “ethical case” for equal rates would still do so if, as above, it were revenue reducing?

So much for ethics, eh?