Solved it: The Chancellor should charge CGT on gilts
As we all know there’s a certain hunger for more tax money out there. So, we should think of new ways to gain more tax money, obviously - the idea that anyone’s going to just spend less is absurd, equally obviously.
We’re also told that the richer should be paying more tax on those absurd profits they make from investing in things. Capital gains tax should be the same as income tax and at the top end this means 45%. Let’s just call that 50% for ease of calculation in what follows.
There’s an about £400 billion* (again, let’s just play with very rough numbers) profit that investors are going to make. All of which will be CGT free. So, we should tax that £400 billion.
The Bank of England owns some £800 billion in gilts. The latest announcement is that they’ll sell £100 billion of this in the coming 12 months. The capital loss is said to be around £50 billion (again with the very rough numbers). This is because those gilts were bought when interest rates were 1 and 2%, now they’re 5%. The loss is already baked in - it’s possible to collect that loss year by year on the difference between the 5% being paid out to banks on reserves and the 1 or 2% being collected. Or, the bonds can be sold and the loss taken as a capital loss. Same difference, different accounting year is all.
OK. But that capital loss will be a capital profit to the buyers. The total return to the buyer will be the 1 or 2% interest coupon plus, obviously, the rise to par value of the bond as it approaches maturity. So, if the BoE is to lose £400 billion here then investors must make £400 billion. The bonds are to be sold at, say, 50% of face value and they’ll mature at 100% of it.
But here’s the thing. That capital profit on gilts is untaxed. Entirely so. It’s also concentrated among the rich. It’s entirely possible for individuals to buy gilts but the poorer tend to go with NS&I instead. It’s the richer, in larger size, that go for gilts.
So, whack CGT on gilts and collect £200 billion over the years. Job’s a good ‘un and the problem is solved, right? After all, why should the rich gain access to a savings opportunity with the government without paying tax for the privilege?
Glad we could help out here.
Hmm, what’s that? There’s a reason there’s no CGT on gilts? In order to encourage investors to buy them? And taxing gilts would make investors less likely to buy them you say? But, but, that would mean that the tax rate on investing changes the amount of investment done, right? And we’re all agreed that we insist upon having a high investment, high productivity Britain, right? So increasing the CGT rate on private sector investing will reduce the amount of private sector investing and thus damage that aim of a high investment economy. Yes?
Well, isn’t that a pretty pickle. Experience tells us that zero CGT on gilts increases investment in gilts. We’re also being told that more than doubling CGT on non-gilts investments will aid us in increasing the amount of investment in our economy. Logic tells us that both can’t be true at the same time.
So, who to believe, eh, who to believe?
We’d suggest it’s the rather hard headed folk who have to write the cheques to those who do invest in gilts. The Bank of England, Debt Management Office and the Treasury. They would all be absolutely horrified at the idea of CGT on gilts. Because they know, very well and absolutely, that this would reduce investment in gilts. Therefore, if we want a high investment economy we need to be reducing taxes upon investing, not raising.
But then logic and government, so, so, difficult to get the two aligned.
Tim Worstall
*Yes, yes, we know, most of the holdings are inside some tax wrapper. This is an explanation of the logic not a real world calculation of the numbers.