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Daily View: Capital gains tax increase

Clare Spencer | 10:47 UK time, Thursday, 27 May 2010

Commentators debate plans to increase capital gains tax.

The Telegraph editorial says that the policy is against traditional Conservative ideology:

"Evidently, this is not a policy with which many Conservatives are comfortable. It was not in the party's manifesto, and was only included in the coalition programme at the behest of the Liberal Democrats. In his interview with this newspaper at the weekend, David Cameron was unequivocal in his support for lower taxes. In addition, there is compelling evidence that an increase in CGT of the sort being suggested would produce less revenue, not more."

Former shadow home secretary David Davis says in the Daily Mail that the plans will "punish the hard-working middle classes":

"An important element of social mobility is breaking through the tendency of whole families to suffer cycles of decline down the generations.
One way to break out of this is to encourage parents to save to help their own children.
In this way, savings and inheritance act as a social ratchet - lifting each generation one step at a time. So unless it is very carefully designed, the plan to increase Capital Gains Tax will not only fail to raise the money needed, it will cost money."

In City AM Allister Heath argues against the claim that taxpayers can easliy dress up income (taxable at up to 50%) as capital gains (on which tax is only payable at 18%):

"There are undoubtedly abuses - but it is simply not true that most investors are able to do this. If Cable can't see that, he ought to ask any small shareholder, investor in an ETF or buy-to-let entrepreneur. They are trapped. As the Adam Smith Institute points out in a new report, if it were so easy to convert income to capital gains, then how do countries that have a zero capital gains tax still manage to raise significant revenue from income taxes? US income tax receipts did not collapse when the capital gains tax rate was cut. What about Hong Kong, which has no capital gains tax? Or Belgium, which also has no capital gains tax but a top income tax rate similar to that in the UK? Why can it still collect income tax at these high rates? Or the Netherlands, with an income tax rate of 52 per cent and capital gains tax of zero? Or New Zealand, which also doesn't tax capital gains at all? Converting capital gains to income is nigh on impossible for most people and the authorities ought to be capable of limiting attempts at income arbitrage by professionals. If the current legislation isn't sufficient, passing new anti-avoidance legislation would be easy and wouldn't require hiking the tax rate for everybody else."

Madsen Pirie argues at the Adam Smith Institute blog why increasing capital gains tax would reduce revenue:

"By making capital investment less attractive, increased capital taxes result in lower levels of investment. The productivity gains produced by investment are reduced, as are the wage increases which they bring in their wake, and the price reductions enabled by lower unit costs.The proposed increase in Capital Gains Tax made no economic sense when it first appeared in the Lib-Dem manifesto. Now that it has been examined and analyzed, it makes even less."

Jeff Taylor in the Economic Voice blog suggests that whatever the technicalities, the result will be an increase in revenue from capital gains tax:

"Many of the assets held are part of people's future wealth, financial and inheritance planning. They possibly hold property and / or shares as part of a carefully balanced portfolio. Any major tax changes will of course upset that balance.
"We may well see a return to a taper relief type system, with exemptions for certain assets or types of asset holders. But whatever we should expect an overall increase in the amount of tax raised by CGT."

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