Tuesday 1 June 2010

Capital: A Tax on Gains

I don't understand the fuss being made about an increase in capital gains tax - or rather I do, I piut it down to mischevious Tories trying to spoil the coalition. I would exempt people like John Redwood making constructive comments about to improve the situation.

The fact that capital gains are taxed at a very different rate from income is very new - it was brought in in 2008, mainly to help some of Gordon Brown's main funders. Nigel Lawson, as part of his tax simplification process, had equalised the rates. This remained the case for over 20 years. There were allowances for the time the asset was held, and some exemptions for entrepreneurial assets.

Those protesting against the increase mainly focus on two issues:
Some research suggests that lower rates bring in more money. However, this is not conclusive as small changes probably don't effect behaviour and wider economic trends have at least as much impact.

The special pleading about middle class second home owners and shareholders is too self serving. Firstly, more tax on gains on such assets is no hardship. Second, if they were bought pre-2008 they were bought under a regime where income and capital tax rates were the same. So the proposed change is no change. If they were bought after 2008 then (in most cases) there will have been minimal gains if not losses so people can readjust their savings now without any serious penalty.

The different rates have caused a big tax avoidance industry to try to turn income into capital. This is both unfair and unproductive. We should want the tax system to be simpler, and harmonising rates is the way to go. I do think it is fair to differentiate some business assets and to encourage saving by having reliefs according to how long assets are held. But these are the points that Tories should focus on (as Redwood has), and we should be grateful the Lib Dems have suggested rate harmonisation. This fits our principles.

Again, I see this as jealous Tories stirring for the sake of it.

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