Why a cut in capital gains tax is the last thing we need

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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?