Dropping progressive manifesto commitments just because they happen to offend the right wing of the Conservative party are becoming a depressingly regular feature of the new administration.
Our guest writer is Howard Reed, director of the economic research consultancy Landman Economics
Before 2007 capital gains tax (CGT) – a tax levied on the proceeds from the sale of capital assets in the UK – had a structure with a headline rate of 40 per cent (the same as the top rate of income tax at the time) combined with a taper system whereby the longer someone held an asset, the lower the rate of CGT had to be paid on it when disposing of it.
This system was widely held to be too complex and was replaced in 2007 by a flat rate of 18 per cent (with an additional ‘entrepreneur’s relief’). The 18 per cent rate was designed to encourage entrepreneurs to build up their own companies without fearing high rates of tax when they sold them later on.
But both the pre-2007 and post-2007 systems had the drawback that they encouraged people who could receive their remuneration in capital instead of income (eg. many of those working in the financial services sector, such as hedge fund or private equity partners) to do just that, meaning that many of the UK’s wealthiest businesspeople paid a lower highest marginal rate of tax – 18 per cent – than people on low-to-medium incomes who faced a marginal income tax rate of 20 per cent. This made a mockery of the concept of tax fairness.
The Liberal Democrats’ election manifesto contained a sensible and progressive proposal to solve this problem – aligning Capital Gains Tax (CGT) with marginal rates of income tax “so that all the money you make is taxed in the same way”. When the Liberal Democrats went into coalition with the Conservatives the CGT proposal was retained even though many of the Lib Dems’ other progressive tax commitments (e.g. the “mansion tax”) were dropped.
However, the proposal has predictably outraged many on the Tory right, with senior figures such as David Davis and John Redwood lobbying against it. Industry groups such as the British Chambers of Commerce have also opposed it. In response to these criticisms from its own heartlands, there are signs that the coalition government will water down the Lib Dem proposals by returning to the pre-2007 taper rate structure, whereby individuals pay a lower rate of CGT the longer they hold assets for.
This would be a big mistake. The evidence from the pre-2007 system is that the taper structure creates distortions between different forms of investment and opens up a huge disparity between people working in businesses where remuneration can be taken as capital gains and those where it has to be taken as income.
Tapers are also a badly targeted means of encouraging entrepreneurship as many people who aren’t entrepreneurs, but are able to hold their assets for several years before disposal, get the lower rates. And there are better – and cheaper – ways of encouraging investment through the tax system than having a lower CGT rate. As the Institute for Fiscal Studies looks set to recommend in its Mirrlees Review of the tax system (see a speech by IFS’s Paul Johnson on the subject here), capital allowances are a much better way of supporting investment in small businesses.
If the coalition’s CGT proposals are watered down for a return to the problematic pre-2007 system it will be a victory for right-wing dogma and against good sense on tax policy. Liberal Democrat cave-ins on important aspects of policy – dropping progressive manifesto commitments just because they happen to offend the right wing of the Conservative party – are becoming a depressingly regular feature of the new administration.
19 Responses to “Worrying signs of a Lib Dem cave-in on capital gains tax”
MICHAEL SPARLING
RT @leftfootfwd: Worrying signs of a Lib Dem cave-in on capital gains tax: http://bit.ly/d9Q086
Duncan Stott
o hai, what are the signs teh Lib Dems are caving in on this? kthxbai
Fat Bloke on Tour
Sorry to return to the issue of the structural deficit and its associated feature the output gap but the whole Treasury view parroted by the OBR has a touch of the BP’s about it — Q+D cut and paste job at odds with real world realities.
I fear the Treasury were feeding AD dodgy numbers in a 1976 “stylee” to make sure he didn’t increase spending in the last year, if not before.
Structural deficit = The part of the deficit that is ongoing and does not relate the economic situation at that specific time.
Structural deficit = Real Deficit – Output gap factor
Output Gap factor (Year Y) = Output gap (Year Y) x 0.5 + Output gap (Year Y-1) x 0.2
Consequently the output gap has a huge and direct bearing on the structural deficit.
Output gap = Long term Trend GDP – Actual GDP
2009/10 Deficit = 11.1%
Structural deficit = 8.8%
Cyclical deficit = 2.3%
This is after a 6.2% drop in GDP, anybody think this is nuts?
But unfortunately the structural deficit is only the monkey not the organ grinder.
Now comes the bit about the organ grinder, the output gap.
The OBR updated the figure for the long term trend growth to 2.1% pa.
The OBR says that the output gap in Dec 2009 was 4% not 6% as noted before.
All this in light of a 6.2% reduction in GDP and two years’ish of trend growth lost in the process.
Consequently you could say that the Credit Crunch lost the country 10/11% of GDP.
The OBR suggests that after 5 years of bobbling along at or below trend we reached Dec 2007 with GDP less than 1% above trend, nothing controversial there but to suggest that after the hell of the Credit Crunch and the 8% ILO unemployment rate and all the people flexing their time to keep their jobs that we now have economic activity 4% below trend suggests that the “Three Brothers Grimm” of the OBR, along with the Reform tribe from yesterday do not live or interact with the real world.
And it gets worse.
What is the OBR story for 2010?
2.1% trend growth and 1.3% actual growth predicted.
What happens to the output gap?
Slight enlargement due to the slow growth?
Tough it is AD’s legacy to a cruel world?
Well you would be mistaken according to the OBR the output gap shrinks.
Just how did they manage to pull that one?
Consequently am I the only one that thinks that someone has set up a kitchen in a library? Makes a change from the usual dog boiler practise of setting up a soup kitchen in the local animal rescue sanctuary. Even then they couldn’t get their story straight as their borrowing figures demonstrate.
The OBR are only a beard for Sniffy’s “fire up the chainsaw for a bit of slash and burn” attitude.
Useful idiots to keep his fingerprints away from the axe.
However you have to hand it to him.
He has a brass neck you could mine.
AD and LB need to get with it regarding a detailed, costed rebuttal.
The coalition really are going at it hammers and tongs, they won’t stop until they are beaten.
Cleggy’s “shock horror, oh the cost” stuff about Tax Credits was shameful.
Howard Reed
Lib Dem cave in on CGT? http://bit.ly/ayhpfh
Cornelius Griffiths
RT @leftfootfwd: Worrying signs of a Lib Dem cave-in on capital gains tax: http://bit.ly/d9Q086