In my book ‘The Joy of Tax' I argued that tax was the single best instrument available to any government to shape the society for which it was responsible.
Any incoming progressive government will face massive social challenges. Leaving aside green issues, the biggest of these will be the income and wealth inequality that is crippling our society and leaving many in poverty.
I've been asked to think about the tax policies such a government should pursue. The aim is to provide a plethora of them, one at a time, starting here. I'm not being detailed. And I'm not costing the proposals. An understanding of MMT suggests that is not necessary. These suggestions are about making the tax system more equitable and just. And that is necessary.
Equalise capital gains and income tax rates
It is quite extraordinary that those with wealth, and who do as a result make capital gains, pay lower rates of tax on those unearned gains than those who have to work for a living pay on their incomes. It is even more extraordinary that those with capital gains get a second annual tax-free allowance over and above that allowance that they, and others, can offset against their earned income. This situation has to change. There are two ways to do this, and both are easy to introduce. The first is to equalise the rates at which income and capital gains are paid by a person. This last happened under Tory governments in the 1980s and 1990s. The second is to substantially reduce the annual capital gains tax allowance. A sum of £2,000 is suggested instead of the current £12,000. This remains more generous than that offered in most countries.
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Certainly agree that rates between income and capital gains should be equalised. The annual allowance is a different matter. One thing certainly not equal is the complexity in calculating the two taxes. Very easy for income but a nightmare for instance on a private home that has been rented out and purchased before 1982. The costs for computing what on the face of it seems like a simple gain can be eye watering. So unless as I hope, you are proposing a bonfire of other reliefs, the allowance needs to be set at a level that makes the tax collected much greater than the cost of computing it.
I am certainly open to rule simplification, but when the principles are right
Phil gives the example of a private house, I wonder how that works with respect to shares? Particulalry in the case where, for example, the sale of one stock is used to immediately purchase another. Since I regard the Uk pension industry as akin to the mafia in its modus operandi – I prefer a DIY approach to pensions. I’m guessing that the pension “industry” rabble don’t face CG on their stock market dabblings – which rather skews things in their favour if others do.
Which raises the question:: is a capital gain taxed on the actual gain or when it is “taken out of the systme” i.e. used as personal income? My guess is that taxation is based on the gain realised at the time of a transaction (regardless of what happens afterwards – that is the case in Belgium) – but as the previous para noted – this seems unfair – given the pension “industry” faces no such rule. BTW – I’m not looking for tax advice – but raising an issue of fairness – that said – the case raised is likely to be very very unusual.
I do not believe any such rollover could be achieved without a wrapper like an ISA or pension fund
But both subsidise wealth and so I am not in favour of the idea
To treat capital gains income differently from other forms of income is bizarre. Even at a headline common rate it would would most likely remain exempt from the NI element affording a ‘natural’ discount of 12%.
This suggests to me that one of the first tax reforms necessary is to stop pretending that NI is not part of general taxation. I suspect most people think it is hypothecated to run the NHS and exists as a pool of money they have contributed to as if it was a piggy bank. In reality it is a very regressive form of income tax.
I’ll get to NI….
I never really understood why Gordon Brown introduced taper relief and broke the consensus that capital gains should be taxed at the same rate as income (consensus since Nigel Lawson aligned the rates in 1988, at least: before 1988, there was the 30% CGT rate, still lower than the top rate of income tax). I am not aware of many strong opinions arguing for lower rates in 1998: as I recall the argument was that gradually tapering the rate would encourage long term investment, but there are separate regimes to encourage really risky investment (EIS, VCT, etc), and I’m not sure there is much evidence that taper relief (or the lower flat rates after 2008) did much more than simply reduce the tax paid by people lucky enough to make taxable capital gains in the last 20 years.
Equalising rates makes sense as an anti-avoidance measure. The divergence of the rates in income and capital has led to a predictable (indeed, predicted) resurgence of the games to turn income into capital, and then HMRC action to reduce that avoidance. But if you do that, you should really reintroduce indexation.
A modest annual exempt amount makes some sense for practical and administrative reasons – you want to catch people making gains of millions, not the stereotypical grannies in Bournemouth selling small holdings of listed company shares. Are there any costings of how much tax would be payable if the annual exemption was abolished or substantially reduced? At present, it saves a person at most £3,360 each year (£12,000 at 28%, although most higher or additional rate taxpayers would be liable to pay CGT at 20%).
Agreed re Brown
I have proposed a sensible exemption
I am not proposing getting rid of chattels relief
The point of doing so: equity, that’s why
And you’ll be amazed how gains disappear if taxed as income….
“And you’d be amazed gains disappear when taxed as income”…do view capital gains as immoral?? Sounds like you want them all to disappear in an instant!
I am saying many are fabricated
Yes definitely but as you suggest this is still generous to the rentiers. Why not give just one tax free allowance regardless of whether income is from labour, capital, house sale or inheritance? Or better, tax capital gains at a much higher rate than earned income. To unleash the productive capacity of an economy, do you need to favour labour over rent extraction?
I think that a good question
Other suggestions will follow….
I’d definitely support having a single tax allowance to use for income tax, capital gains tax or split between the two as the taxpayer in question saw fit. You could sell it as being like the ISA allowance that people can apportion between cash ISAs and share ISAs as they wish.
I’d also support adding all income and capital gains together to determine the tax band to use, so people can’t juggle their income and capital gains to stay out of the higher tax bands.
The latter has to be one of the most stupid wastes of time imaginable
“The latter has to be one of the most stupid wastes of time imaginable”
You really don’t pull your punches 🙂
I went looking for more information to help me explain what I was thinking about and realised I was in fact talking nonsense. Please accept my apologies for wasting your time with it.
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