Its almost ironic, and perhaps inevitable, that at the time that the case for increased taxation of capital is being made so effectively by Thomas Piketty the Daily Telegraph has chosen to publicise a new report from the Centre for Policy Studies that calls for a reduction in the rate of capital gains tax in the UK, claiming that it is an impediment to entrepreneurship.
Try as I might I cannot find the report to which the article refers on the website of the CPS at present, so I will have to work from the second-hand reporting of the Telegraph, which the CPS seem happy to promote on their tweet feed. In the Telegraph report it is said that capital gains tax is applied in the UK at rates between 18% and 28%, and that whenever capital gains tax exceeds 25% there is, apparently, a disincentive to new enterprise.
This, very politely, is an absurd claim. The first £10 million of gains made by any entrepreneur in the UK are taxed at only 10% - a fact that is never referred to in the Telegraph's story. The whole premise of the article is, therefore, wrong.
All of it is also predicated on the almost universal mantra of the right when it comes to tax. As the Telegraph notes:
[ The report's author] also warns that high tax rates make it more likely that successful entrepreneurs will emigrate to tax havens. “In this way the public sector loses revenues which would have been paid if they had stayed in their home country.”
I do wonder whether the report's author has ever actually met an entrepreneur. If he had he would realise that entrepreneurial activity is dependent upon the availability of infrastructure, technical support, advice, highly trained staff who are motivated to take the risk of working for an entrepreneur, the interchange of ideas, the close availability of sources of capital and access to potential markets. Let me assure you, not one of those things is available in the tax haven. The claim made is quite absurd.
In that case what this article actually represents is a demand that capital gains tax be reduced on those who invest in what are considered to be entrepreneurial companies, as is obvious from the linkage to the claim that increased venture capital funding would be available if capital gains tax were reduced. By definition, venture capital funds are not entrepreneurs: they are investors, and speaking from the experience of having created entrepreneurial companies in which venture capitalists invested, I can assure you that the two are very different, and usually have little comprehension of each other.
So, this then is an appeal by the Daily Telegraph via the CPS for taxation of capital to be reduced, and in particular, for capital gains tax to be cut. Let's ignore for a minute the impact that this will have on inequality, significant though that is. And let's ignore the fact that entrepreneurial flair need have no association with being born into wealth and yet the increased concentration of capital that reduced taxation of wealth will create will, inevitably, deny access to capital to the vast majority in this country, whether they have ability or not. And let's also ignore the fact that Mariana Mazzucato has shown that the vast majority of innovation comes as a result of state spending, and not from individual entrepreneurial activity. And let's also just ignore the fact that the article is straightforwardly wrong. Let's just instead for a moment consider the implications of reducing capital gains tax.
What this would, of course, provide is a gaping loophole for the rich to try to exploit in their never-ending, and wholly unproductive, quest of reducing their tax bill without taking into consideration the benefits for society at large. Then think about that for a moment and realise that there are three consequences. The first is, of course, a loss of revenue. How is that be made good when we still have a deficit? Secondly, loss of revenue will not be restricted to capital gains tax alone: CGT has a primary goal of acting as a stopgap to prevent a loss of income tax through misrepresentation of the nature of a source of revenue to a person. As the differential between the income tax rate and the capital gains tax rate increases so does, of course, the incentive to abuse CGT rules and income tax yields fall as a result. And then, thirdly, let's recognise that real entrepreneurs will pursue their activity come what may, and none that I have ever met took tax into consideration when starting at activity. It was only when they became rent seeking wealthy owners of intellectual property that arose as a consequence of their previous, and by then largely fondly remembered but otherwise dormant entrepreneurial existence, that they took tax into account and the lure of tax havens might have become real.
In other words, not only are the claims made wrong in fact with regard to tax rates, they are also wrong in substance and show a profound misunderstanding of entrepreneurialism and the UK tax system and what it seeks to achieve.
But then, why let facts get in the way of a good tax cut? They never have before, so why start now?
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Freely available on the CPP website. To be frank, I think you should have read the report first before blundering into print.
Could you please provide a reference for your assertion that CGT was primarily aimed by the sorceress turning revenue into capital?
I have not blundered into print – I quoted the report’s author
The point re turning revenue into capital dates from 1965 on
I agree that while a differentiation between income tax and CGT rate remains there will be a desire to convert “convert” income into capital. In fact, the practice pre-dates the introduction of CGT because prior to 1965 capital gains were tax free.
The question is that if there is a genuine dearth of venture capital, what further incentives (which may include tax incentives, such as the Enterprise Investment Scheme) and measures should be considered to encourage those with capital to invest in smaller enterprises.
A wholesale cut in the CGT rate is unlikely to fulfil this and will just lead to the development of tax avoidance schemes.
The answer is state funding paid for by reduced tax relief in other areas
The reintroduction of the flat rate 18% rate in 2008 was always an absurdity, which was only partially addressed by the addition of the 28% rate in 2010. Despite its faults, the alignment of CGT and income tax rates with the subsequent introduction of taper relief to encourage longer-term investing was sensible – albeit obtaining 75% business asset taper after only two years (thereby creating an effective tax rate of only 10%) was probably too generous.
The taper was far to generous – yes
But alignment is essential
Aligning CGT and IT is the only coherent strategy, I agree.
I’m rather fond of indexation: though of course it’s only an approximation it does give some relief from inflation giving tax on gains that don’t really exist, while still taxing realised gains.
Entrepreneur’s relief has always struck me as being extraordinarily generous, especially with the cliff-edge distinction between trading and other businesses.
So my preference would be to: up the rates to match IT; bring back indexation; broaden the scope of ER but consider reducing the discount.
For once we are broadly in agreement
The original report is currently highlighted on the front page of the CPS site, and also under publications>reports. Direct link:
http://www.cps.org.uk/publications/reports/superentrepreneurs-and-how-your-country-can-get-them/
It’s basically a love letter to trickle-down economics.
Oh, it’s that one is it?
Looked too sickening to open….
I agree with your one line summary
“I do wonder whether the report’s author has ever actually met an entrepreneur. If he had he would realise that entrepreneurial activity is dependent upon the availability of infrastructure, technical support, advice, highly trained staff who are motivated to take the risk of working for an entrepreneur, the interchange of ideas, the close availability of sources of capital and access to potential markets. Let me assure you, not one of those things is available in the tax haven. The claim made is quite absurd”
Come on Richard, even the entrepreneur in you set up in a tax haven!
No, I never did
That was never my choice
But I do not deny that in my 20s – long before anyone anywhere realised the harm of these places I saw what their use involved as a consequnce of the decision of others – and resolved never to be involved again
“I was responsible for creating the company and establishing it in Ireland in 4 months, from first visit to product going down the line.”
That’s your 2006 CV Richard.
It doesn’t mean I decided to do that
I agree its not the CGT or any tax that stops people becoming great business people. Its the envy people have for them, their salaires and wealth that is created. SO they don’t bother, and we are all poorer for it.
Utter nonsense
One can of course understand the mantra of the deserving rich, but it seems, amazingly, that the ragged trousered philanthropists are alive and well.
The Centre for Policy Studies does not reveal who its funders are. On it’s website it pays homage to Sir Keith Joseph and says it promotes policies which limit the role of the state and promote “the principles of a free society and has played a global role in the dissemination of free market economics. Its role in developing the policies of privatisation, low-tax government and support for the family.” It then goes on to say it is independent of all special interest groups!
It is a propaganda organisation for the few and (sorry to repeat myself, Richard) the BBC should not, as a public body, be quoting it on the news-unless the source of the opinion is available for scrutiny. How often do they quote this blog or the tax Justice network?
Re the last – I advise the BBC quite often and get on air reasonably often; TJN slightly less so. But these right winf think tanks do seem to get disproportionate air time
I think the Entrepreneurs rate is about right. But I do think CGT and Income Tax rates should be aligned.
But maybe, what does it matter what the rate is, if it is not collected in the first place? !!. I don’t think there are many HMRC CGT investigations.
The last is interesting….
I’m seeing a fair few, on property at least – they seem to be making good use of Land Registry and bank records to identify transactions.
Too good in some cases, like the one where remortgaging the family home has prompted a request for details of the taxpayer’s property rental business (er, there isn’t one, this was the family home…) and why it hasn’t been disclosed before now (er, see above), but I’d rather have a few false positives than have genuine enquiries being missed.
OK on Property sales I grant you, but that should be like catching fish in a barrel, (apart from recording false values, a nasty habit that goes on) but how many Investigations of other types of Capital Gains?
I have a few relating to shares and IP: we often seem to get a query on the valuation, some of which disappear in no time and some drag on a bit. Which is what I’d expect for a subjective area like that.