Reforming Capital Gains Tax won’t increase tax revenues
Obviously an amusement at the nominative determinism here:
Rachel Reeves is about to hoodwink Britain with a disastrous tax raid
How Thatcher’s chancellor could be the unlikely inspiration for Labour’s capital gains tax
Adam Smith
However, in all this talk of how capital gains tax is to be reformed the one thing we’ve not seen mentioned. It’s not going to increase tax revenues very much if at all.
The Resolution Foundation describes the current CGT regime as a “source of unfairness in our tax system” and Dan Neidle of Tax Policy Associates wrote that “it’s inequitable that a type of income received mainly by the wealthy is taxed less than other types of income”.
These arguments are persuasive on the left of centre and frankly quite compelling to the general public. A number of high profile, new Labour MPs such as Torsten Bell, previously head of the Resolution Foundation, have been making them for years and I assume would continue to do so.
So, fairness, equity and all that. Fair enough.
To try to counter those groups Rachel Reeves could turn to an unlikely source of inspiration for a Labour Chancellor: Nigel Lawson. When he equalised capital gains with income tax in his 1988 Budget he argued that “taxing them [capital gains and income] at different rates distorts investment decisions”.
Also fair enough. But it’s still not going to increase tax revenues very much if at all.
For back when Lawson did it he included an inflation adjustment. Indexation that is - and that has to be a part of the calculation of what the capital gains tax rate should be.
Think on it. As the BoE calculator tells us inflation over the past 5 years has been 24% (or, more accurately, that what cost £10 then costs £12.40 now and we’re not going to bother with adjusting that to a proper inflation rate because our maths is not up to that, not up to even working out whether that is the correct inflation rate). Or 15 years 54% and 25 years 85%. So, obviously there needs to be indexation because why would we tax people on gains made purely from inflation?
When the CGT rate was dropped, as it was, to lower than income tax rates the indexation allowance went as well. And the calculation was that, over all collections and over time, the revenue yield was going to be about the same. A lower rate, but charged upon purely inflationary gains as well as real, would collect about the same amount of tax as a CGT = IT rate with indexation. Well, OK. But that then means that if we change the system back, CGT rates are now to equal IT rates but we bring back indexation then the revenue collected is also going to be about the same. So, sure, maybe the change makes sense in some political meaning of “fair” but it’s not going to do much for revenue collection.
Shrug.
Obviously indexation will come back as well. For the current analysis is that Britain’s economy lacks that patient and long term capital necessary for truly useful investment and economic development. So of course no one’s going to bring in a capital gains tax where the rate increases the longer you hold the asset now, are they? That would just be ridiculous, insane even. Hold an investment for 25 years, there’s an 85% gain that you’ll be taxed 45% upon but that gain is purely inflation and so you’re paying tax to not even be able to stand still?
No, obviously, indexation will come back as well as the equalisation of rates and there will be no more money for anyone to spend. At which point really, why bother? Other than the political optics of course.
Hmm? What’s that? You think they’ll equalise rates but not bring back indexation? Ahahahahaha, gurgle, snort, aha, aha, aha. No, really, there’s no one in Britain that damn’d insane. Not even in politics.
Tim Worstall