The Institute for Fiscal Studies issued a new report on the reform of capital gains tax yesterday, some parts of which are welcome.
Firstly, they suggested that the reform of capital gains tax is important whether or not it raises additional revenue because the existing system is unfair in itself. This is a welcome development because it recognises that tax is not all about revenue raising, if it is about that at all.
Secondly, as they made clear throughout the report, there are no good reasons why capital gains tax is charged at less than income when it comes to passive sources of return on investment, i.e. those that result from saving.
Thirdly, and as importantly, they also make clear that there is no good reason why the return to work should be taxed differently if some of it gave rise to earned income and other parts gave rise to capital gains. Both, they suggest, should be taxed at the same rate to remove distortions in the tax system.
Fourthly, they propose that the exemption from capital gains tax on death should be removed, which I welcome.
Fifthly, they challenge the claim made by HM Treasury that increasing capital gains tax rates by 10% would reduce revenues. I agree with that challenge. HM Treasury has never shown its workings that support this calculation, and the assumption that it is true is just that: it is nothing more than a guess based upon the existence of the Laffer curve, and that is unjustified.
That's the good news. Then comes the almost inevitable neoliberal nonsense that shows the complete lack of understanding that organisations like the IFS have of taxation when much of what they say is based on the archly neoliberal Mirrless report of a decade or so ago, of which I was deeply critical at the time and ever since.
For example, they seem wholly unaware of the role of savings in the macroeconomy (which have a marginal contribution to macroeconomic well-being at best but are of enormous benefit to those seeking to create and reinforce inequality in society) or of the structure of most small businesses, where the amount invested in capital is generally utterly insignificant in comparison to investment in time, and through the provision of loans.
Based on their false assumptions, and despite the apparently positive points I have noted previously, the IFS suggest a number of ways of reforming CGT, including making the normal rate of return on a person's investments free of all tax, with this return being defined as the interest rate payable upon medium-term government bonds.
The benefits to the wealthy from this variable tax-free allowance, which would obviously increase as your wealth does, meaning it is the exact opposite of what is required by a progressive tax system, should be apparent. Those with wealth would be able to enjoy enormous amounts of income tax-free which would be entirely unavailable to the rest of society, of which fact the IFS appears to be completely unaware.
Alternatively, they suggest organising the tax on a cash flow basis so that deductions can be made when sums are invested in assets subject to all proceeds from sale then becoming taxable. Despite that, they still discuss the possibility of indexation allowances to allow for inflation, which makes no sense at all. Such a scheme would, of course, significantly defer the time when most capital gains tax would have to be paid because a built-in tax avoidance arrangement resulting from simply reinvesting the proceeds would then effectively be built into this tax. The fact that tax deferral rather than absolute avoidance is a significant part of tax planning appears, once more, to have evaded the attention of the IFS.
There are other proposals made, including the abolition of what was once called entrepreneur's relief, but overall this is a typically disingenuous report from the IFS. Whilst appearing to offer a real prospect of change to capital gains tax by holding out the chance that this tax might, eventually, collect more revenue on the death of people, the superficially attractive proposals like equalising tax rates are massively outweighed by the generosity of the reliefs and allowances for the wealthy that would be built into such structures, meaning that their overall tax rates would, despite the increasing rates, almost certainly fall significantly.
This is not the capital gains tax reform that we need. For that, see the Taxing Wealth Report. The IFS proposal is, instead, what happens when you set out with the following goals:
1. To pretend you are reforming when you really are not.
2. To appease the wealthy.
3. To define fairness as being equity for those with wealth
4. To presume that making the wealthy wealthier is the goal of society, and you disguise that fact by describing increasing inequality as growth without asking who benefits.
5. To refuse to consider the interests of anyone but those who pay capital gains when reforming that tax.
Were these the goals of the IFS? It really does look like it.
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The IFS is just a mirror held up to corrupt people to make them feel comfortable with what they are doing.
I dont know how these things work but presumably under the current system it must be more attractive to generate returns as Capital Gains rather than income so there may be something in HMRC’s prediction in a drop in declared Capital Gains.
Why?
Because if I can declare something as a capital gain at the moment then I get a more favourable tax rate but if I don’t then why bother
Because investment is rally not about tax.
Investment is about returns and risk.
And if you are getting taxed higher then returns are lower, so people won’t be prepared to take the risks and investment will fall.
Which is the opposite of what the country needs.
The risks that are taxed by CGT almost entirely arise in the City of London casino – and not from anything t9o do with investment, almost all of which is funded by loans for large and small business alike.
In that case what you have said makes no sense. Why shouldn’t we tax a harmful gambling activity quite heavily to prevent the harm it causes?
“The risks that are taxed by CGT almost entirely arise in the City of London casino – and not from anything t9o do with investment, almost all of which is funded by loans for large and small business alike.
Absolute nonsense. Funding for private equity dwarfs that of listed markets and the majority of that funding is in the form of equity for start ups annd growth capital. And it is this which allows the economy to grow. And if taxation increases then the level of activity will reduce in the U.K.
You clearly have no idea how destructive private equity is and how much it is loathed by entrepreneurs.
“You clearly have no idea how destructive private equity is and how much it is loathed by entrepreneurs.”
how do you think entrepreneurs get capital to start a business or grow a business? A small bank loan if they are lucky, the rest is private equity, which is a very very broad term. Ultimately it means the Company isn’t listed that’s it!! Look at the financial history of Tesla to observe how private equity creates growth and innovation.
Anyway regardless of your prejudice the reality is economic growth is largely generated by private equity. Here is a recent report by EY which states the scale is now around 24 trillion and more important it is growing rapidly.
https://www.ey.com/en_gl/insights/private-business/are-you-harnessing-the-growth-and-resilience-of-private-capital
You really do not know almost anything about small business in the UK – a tiny part of which is private equity funded – so engaging with you is a waste of time.
And yes, I have done private equity funding as an adviser and as a recipient. I really do know what I am talking about.
“entrepreneurs”
For many entrepreneurs, their business is their ‘pension pot’. Built up over years the early part of which will often have seen them make huge sacrifices in time and money with little initial reward to show for it. They hope that their business can grow to the point where the sale of it enables them to retire. They likely won’t have had the resources to set up their own pension – probably thinking they didn’t need to after all the effort of building a successful business, helping the UK economy, providing jobs.
The difference of course is that a pension pot will have grown tax free. What you want to do is take nearly half of the entrepreneur’s ‘pension pot’ from him or her in tax.
Is that your idea of ‘fair’?
And remind your readers of the rates of tax you paid when disposing of your own business ventures.
As an entrepreneur myself (and I have been, several times) I can tell you any business worth selling will have also been able to fund a decent pension for the owner – so what you are claiming is total nonsense. If the business could not fund a pension, or the owner could not be bothered to do so, then t either there is little tax to worry about or we need not subsidise their own failure.
Mr Davis,
You are using the word “entrepreneur” here as someone to be admired for their enterprise. The case you offer, a person who looks after the business over many (we must presume including some good years, if the business is worth selling), without giving a thought to tax or pensions (we can only hope he/she is a single trader, because who wants to work for anyone so negligent?); if he/she is the heroic risk-taker you are painting, then in failing to manage either tax or pensions, they are simply on the wrong side of what is another business risk – and bad decisions. Business is not all ups, but there are downs; as anyone in business well knows. In business, sometimes you have to live with your mistakes, however hard you try to wriggle; and you are wriggling here. Tax consultants files are full of business people, wriggling like hell, after the event.
Well said
Dominic,
Try reading Applebaum and Blatt, ‘How private equity firms are designed to earn big while risking little of their own’ (LSE Blogs, 2017). Here is an excerpt: “Leverage is at the core of the private equity business model. Debt multiplies returns on investment and the interest on the debt can be deducted from taxes. PE partners typically finance the buyout of a company with 30 per cent equity and 70 per cent debt. Private equity funds use the assets of the acquired company as collateral and put the burden of repayment on the company itself. The PE firm has very little of its own money at risk – PE partners invest 1 to 2 per cent of the purchase price of acquired companies (2 per cent of 30 per cent is .02*.3 = .006 or 0.6 per cent). Yet they claim 20 per cent of any gains from the subsequent sale of these companies.
PE firms play with other people’s money – from investors in its funds to creditors who provide loans. Leverage magnifies investment returns in good times – and PE firms collect a disproportionate share of these gains. But if the debt cannot be repaid, the company, its workers, and its creditors bear the costs. The PE business model is a low risk, high reward strategy for PE firm partners.”
I spent my life in business, and that looks to me like a fair summary.
@Treveor Davis
“…probably thinking they didn’t need to after all the effort of building a successful business, helping the UK economy, providing jobs.”
You think that was what it was about. ??
Bollox. Creating ‘jobs’, ‘helping the UK economy’? Get real Trevor. Self interest is what you are describing.
And that ain’t entirely wrong, but don’t let’s get sanctimonious about it. Please(?)
Nice try Debs Goody, but are you for real? I don’t think so, but I haven’t figured out the anagram.
You should send a version of this critique direct to IFS, and publish it on X etc
The link is on X
Simone at the IFS follow me
I think I can be quite sure they will not listen – it does not pay them to do so
But that is the antithesis of academic debate – ‘not listening’ seems almost political – just like Labour wont respond to any attempt to debate their economics.
IFS could refute you but ‘not listening’ shoudnt be an option.
Arent their research grants for ‘research’ – which implies discussion, debate, refuting , referencing etc etc.?
@Andrew Broadbent
“…Arent their research grants for ‘research’ – which implies discussion, debate, refuting , referencing etc etc.?…”
Nice idea, but…….when you are part of the ‘Establishment’ you don’t want to be rocking the boat or you get to be an envoy to the regions 🙂