There is an article in the Financial Times today under the title:
CGT is a ‘stealth wealth tax'
There is a great deal said in the article that is simply polemical, with little evidence base, but the claim in the title is worth considering.
I will use evidence to support my case. The evidence comes from the budget speech of the late Rt Hon Jim Callaghan, then Chancellor of the Exchequer, on 6 April 1965 when introducing capital gains tax. He said:
First, I begin with tax reform. The failure to tax capital gains is widely regarded, outside as well as inside the Labour Party, as the greatest blot on our existing system of direct taxation. There is little dispute nowadays that capital gains confer much the same kind of benefit on the recipient as taxed earnings more hardly won. Yet earnings pay tax in full while capital gains go free. This is unfair to the wage and salary earner. It has in the past been one of the barriers to the progress of an effective incomes policy, but now my right hon. Friend the First Secretary of State has carried this policy forward to a point which many did not believe was possible six months ago. This new tax will provide a background of equity and fair play for his work.
Moreover, there is no doubt that the present immunity from tax of capital gains has given a powerful incentive to the skilful manipulator of which he has taken full advantage to avoid tax by various devices which turn what is really taxable income into tax-free capital gains. We shall only make headway against avoidance of this sort when capital gains are also taxed.
He made four key points then.
First, capital gains contribute to income as much as does the reward from work.
Second, it is wrong that this source of income be untaxed, and it is unfair to the wage earner that capital gains be subject to a lower tax rate than work.
Third, capital gains tax is in that case about delivering tax justice (although the term was not known then, as far as I know).
And fourth, capital gains tax was necessary to beat avoidance of income tax.
It follows then the claim in the FT is wrong. CGT is not a tax on wealth. It is a tax on income disguised as an increase in wealth. And there is no stealth about it: the intention of the tax is entirely clear.
The problem has been that the clarity of understanding and purpose implicit in Callaghan's speech has been lost over time. But now capital gains tax is to be subject to a review it needs to be restored.
We could do a lot worse than remind those undertaking the review as to Callaghan's objectives for the tax. They remain as relevant today.
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Completely agree. This is what Inland Revenue trained Inspectors to understand back in the 80s. It’s function has not changed since then.
It is a pity that HMRC has long since ceased training inspectors….
I was initially (slightly) outraged that FT should think Capital Gains Tax a “stealth” tax…. but when I looked up the article and saw it was by Merryn Somerset Webb I calmed down. Nobody takes her musings seriously.
However, reading the speech was interesting. It’s a real reminder of how useless thew current crop of leaders is.
🙂
There are 2 insidious points here: first, that certain types of income have been called “unearned” (by Henry George, I believe). That has allowed the rich to modify the tax code such that unearned incomes has been (is?) more lightly taxed, as Callaghan pointed out.
The second, is “stealth” taxes, which implies that they are of doubtful integrity. Is the term at all useful or simply another attack on tax fairness?
What follows is not to argue against CGTs but to highlight one or two issues.
The implication is that CGTs would be levied on individuals. I guess these could include people that own/rent property and which sometimes sell a property at a profit?
I guess the prospect of a CGT would “encourage” them to set up a company (had they not already done so) & one supposes the company would then be taxed.
What about individuals that invest in start-ups? How to balance losses (inevitable) against gains. I suppose some sort of timing mechanism?
If CGT is implemented, I have a suspicion that it will “go after” the middling sort whilst those that have the real money will get off scott-free – through better organisation etc.
It won’t happen under the current gov-of-no-talents – but maybe a wealth tax would be a better route? Could also encourage more focused investment (sorely lacking in the UK).
Mike
All these questions are answered by the existing CGT
I am n to sure where to start…
Richard
Of course, and the current low rates of tax on gains fuels avoidance behaviour (people turning income into capital) that was all but eliminated before taper relief was introduced in 1998. 10% or 20% on gains versus 40%+ on other income is a no brainer.
Also relevant is the work that Andy Summers and Arun Advani and others have been doing. https://www.resolutionfoundation.org/publications/who-gains/
“Capital gains matter for a number of reasons. They’re big. They’re concentrated among a relatively small number of people. They have varied significantly over time in response to both economic and tax policy changes. And they are often interchangeable with other forms of income that are included in existing income statistics. Around half of all taxable capital gains now relate to people’s occupations, rather than the traditional stereotype of gains made on arms-length investments, but neither our income statistics nor tax policy have kept pace with this development.”
We are all talking to each other
An increase in capital gains tax sounds reasonable, but only if it doesn’t tax illusory gains resulting from inflation. So there has to be indexation
Why?
There isn’t in trading
It would clearly only be ‘fair’ to tax real gains, not nominal ones – an individual that has taken a risk, with a result that they are in exactly the same position as before (in real terms) has no genuine gain that should be taxed.
Why?
It’s real pounds that they have
Why should these have such preferential treatment?
Why shouldn’t the unearned gains from QE be recovered?
Surely it’s pretty obvious that trading is very short term, where inflation does not have a meaningful impact on the outcome.
For longer term investments, as opposed to trading, a key part of the expected return is due to inflation – that’s basic economics.
I can assure you that inflation had a very real impact on profit when I was a young man
Now it doesn’t
Burnout does generate wholly unweaned gains
Why not tax them precisely for that reason?
If you don’t index capital gains then it really is a wealth tax. For example, woman receives a divorce settlement of £100,000 and uses it to buy a house. If inflation runs at 2 1/2 % each year, then in 20 years the purchasing power of £100,000 in year 1 is equivalent to £163,861 in year 20. If she wants to move house in year 20 and sells the house for £163,861 then without indexation she would pay a capital gains tax on a “profit” of £63,861 which is not in fact a profit at all.It has the same value as her original £100,000.
We don’t pay cgt on housing
It does nit make your case to use an unreal example, literally
You are of course correct that there is not CGT on one’s private residence, but I suspect that will come soon and Government is already consulting on it. And am I not right in saying that this is something you approve of? Surely the obscene profits made by some lucky homeowners should be taxed? After all, in many cases the price uplift has been generated by public investment such Crossrail or HS2
I approve of CGT on death – and then of the second death of a couple. Rules around earlier sale would also be required. But I compensate by saying we should get rid of inheritance tax, albeit that we need a wealth tax.
Get rid of Inheritance Tax?? Presumably you would replace it with a gift tax on the recipients then?
Yes
See The Joy of Tax
“See the joy of tax..”
Feck off trying to profit from your righteousness., your no better than profiteering capitalist scum
Wow…earning a living is a terrible thing to do I see