Align income and capital gains tax rates
January 7th, 2010
A tax regime that works | Nizar Manek | Comment is free | guardian.co.uk .
Nizar Manek notes:
Just after the 1987 Wall St crash, Nigel Lawson, then chancellor,commented:
In principle there is little economic difference between income and capital gains, and many people effectively have the option of choosing, to a significant extent, which they receive. In so far as there is a difference, it is by no means clear why one should be taxed more heavily than the other.
As a result he argues rates should be aligned again.
And he’s right to do so.
I agree but only if there is index linking. There’s nothing that would annoy the electorate than a tax that amounts to confiscation!
I meant “there’s noting that would annoy the electorate more than . . .”
@Catherine Holmes
Why is taxing gains confiscation?
Why shouldn’t inflationary gains be taxed? They improve relative well being?
Indexation from when? And what index?
We once had indexation and it simply exempted real returns
Why should that be appropriate?
Richard
Nizar has a good point, but I think it would make more sense to have a capital gains tax set at a slightly lower rate than income tax. I am not an expert on tax evasion, but I guess it takes some (legal?) effort to have income that is subject to income tax declared as capital gains. That would cause people to evade only if it’s worth the hassle, i.e. the difference between the rates is large enough.
Also, the article fails to mention the distortion of the savings decision caused by the CGT. I do not know about the magnitude of the distortion and, eventually, the difference in the savings rates, but I think it’s worth addressing the main critique of capital gains taxation.
Johannes
“Taxing nominal gains raises the effective tax rate on real capital gains and can lead to imposition of a tax in cases of real economic losses. Several studies have shown that a large percentage of reported capital gains reflect the effects of inflation, with the capital gains of lower- and middle-income taxpayers commonly representing nominal gains but real economic losses. The indexing of the cost or basis of an asset has frequently been proposed to correct for inflation.”
http://www.taxpolicycenter.org/publications/url.cfm?ID=1000519
But, those gains, even if inflationary can distort the allocation of resources in society very severely. Note for example the consequence of not taxing gains on houses and the fact that indexation has always been on retail not asset prices.
So their implict assumptions in your claim which need serious justification and clarification before they can be accepted to be true.
If we argue that inflationary gains should be exempted, this distorts the comparison with those assets is cash. In many cases interest on deposits is barely greater than inflation. Should we say that interest should be exempt from tax too? I don’t think so. But I thnk that equity demands that interest and capital gains be treated the same way.
Richard
Your comments just now go back to something that I posted yesterday on another thread and which you impolitely rubbished.
If we go back to the oldest saw in the tax policy toolbox - I earn £x income and decide to invest some of the net income (after tax, NI etc.) in my house. Why should government deem the gain on that house, if there is any, to be part of the national tax base? Is that fair? We could discuss IHT in similar terms.
I’m not saying that the policy decisions are easy. Before 1965 lots of people sought to convert income into capital. As I said yesterday, however, such policy decisions are political and almost never based on economics or natural justice; and I’ll hold to that line even in the face of your accusing me of twaddle.
The Pouting Girrl
@Jersey Girrl
I described as twaddle your claim that government has no natural right to tax
It has
It establishes property rights unless you believe cudgels can
In which case it can also establish that the property right ahs attached to it the duty to pay tax on its increase in value
Unless property rights are unnatural this right to tax is natural, proper. legal and appropriate
Of course the choice is political
It’s also pragmatic
No CGT = massive IT avoidance
That’s the main reason for a CGT
It also supports the view the rate should be the same
Richard
But you’d have to have some sort of special treatment for house ownership or that really would distort the market. At least some sort of roll-over relief
Why?
House prices are so high - and so distorted that most can no longer afford them - because they are not taxed
Wouldn’t it be better that tax be now, gradually, introduced to suppress the market and let young people back into the market again?
Do I have to say it? Yes - tax the land element only - 100%. It’s the land which holds the value - a value not created by owners at all. No need for any other property tax - there wouldn’t be any capital gain on the bricks and mortar.
CGT and IT rates were firs aligned over 20 years ago (with effect from 6 April 1988) under Nigel Lawson.
Ten years later a certain Mr Brown, then Chancellor, simplified the regime and removed indexation relief - replacing it with a form of taper relief to “stimulate entrepreneurial activity by rewarding longer-term investment in businesses.” (His own words in the 1998 Budget statement).
As a result, the effective rate of tax on many business assets could be as low as 10% until 6 April 2008. For non business assets the lowest rate of CGT payable by ‘the rich’ was 24% on assets owned for more than ten years.
ALL short term gains were therefore charged at an individual’s marginal income tax rate - just as Nizar Manek suggests should be the case now.
This only changed less than two years ago, To my knowledge NO professional bodies or other informed commentators were campaigning for a change so it came as a total surprise when Mr Darling announced the (effective reduction to) a 18% flat rate with effect from 6 April 2008.
As I said on the TaxBuxx blog in August 2008, “I have yet to hear any logical or policy reason for allowing anyone who makes short-term speculative gains to pay only 18% tax thereon.”
The problem now is that to REINTRODUCE the simple, straightforward system we had until 2008, would require Mr Darling to accept that he made a mistake. Chancellors tend to avoid that. So instead either the prospective tax haul that would be secured will be ignored - or, more likely, a needlessly complex system will be introduced - with the blame being put on all the naughty tax avoiders.