The Government must hold its nerve on Capital Gains Tax

The new Government proposes raising the tax rate for capital gains. It is a sensible, progressive policy during the recession and they must hold their nerve.

Cutting the deficit is quite rightly the number one priority for the new government. It favours cutting public spending over raising taxes to achieve this. But however deep the cuts, avoiding any increase in taxes is simply impossible – reflected in the coalition’s sensible pledge to increase non-business capital gains tax as part of its fiscal strategy.

Unsurprisingly, a number of Tories are up in arms at the thought that the gain on second homes, shares, art, classic cars, fine wine and other similar assets may be taxed at rate equivalent to personal income tax rates. John Redwood, speaking for a substantial group of Conservative MPs, called the proposed plans “anathema to most Conservatives”. In contrast, Left Food Forward believes that given taxes must rise, raising capital gains tax is an economically sound, fair and progressive measure.

Currently, even if an individual pays the 50 per cent top rate of tax on their ‘earned’ income, they currently pay only 18 per cent on the profit over £10,100 they make on the sale of a second home, for example. Therefore a £100,000 profit would incur a tax bill of £16,182. Under the mooted proposals, they would pay closer to the 50 per cent on the profit above perhaps £2,000 – a substantial increase to perhaps £49,000. Multiply these profits by a factor of ten, and the beneficiaries of multi-million pound house price increases in Notting Hill begin to sweat.

But consider the desirability of the alternatives. Other than capital gains, governments can tax personal incomes, corporate incomes, or certain types of expenditure. Further increases in income taxes are not on the agenda for any political party for both political and pragmatic reasons (indeed the new government is due to raise the lower threshold to £10,000, effectively giving everyone a tax cut, however regressive). Increasing corporation tax is inadvisable at a time when Britain must retain and attract businesses. In fact the Tories plan to cut corporation tax, meaning shareholders will see more of their profits as dividends or reinvestment. And an increase in VAT hurts the poorest disproportionately, where an increase can materially reduce the purchasing power of those on the lowest incomes.

Capital gains is unearned profit that is primarily a matter for the rich. If an individual chooses to monetise the value of an inherited painting by an artist that just happens to be in vogue, taxing the gain at a meaningful rate neither penalises hard work nor acts as a disincentive to economic activity. It merely shares the benefits of fortunate birthright around. Second (or more) home-owners can be described as property speculators, who among other things drive up the cost of homes and reduce the availability of affordable housing across the country. Using debt they can generate enormous profits purely on the back of a rising property market – why on earth should this ‘income’ be taxed at a lower rate than plain old hard work and graft?

Assuming that value generated by genuine entrepreneurialism – as opposed to ill-advised merger & acquisition activity – is dealt with sensibly, that the thresholds are set to ensure that small, long-term investors are not materially affected by an increase (particularly if they are not top rate taxpayers), and that the thorny issue of indexation is carefully considered, then raising capital gains tax is the ‘least worst’ option of the alternatives.

As with Labour’s so-called ‘Jobs Tax’ or indeed the disaster that was supposed to accompany a hung parliament, be prepared for scare stories of a property market crash, “wealth creators” fleeing to Geneva and eventual economic meltdown. The fact is that in times like these, the burden must be shouldered by all. The Prime Minister and Chancellor know this. Let’s hope they can hold their nerve.

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