I mentioned Dan Neidle's proposed reform of capital gains tax yesterday. As he had previously done with investment income, he suggested that the 'normal rate of return' on investment should go untaxed when making his suggestions and that only the excess should be taxed.
As I noted yesterday, he made no suggestion that the normal rate of return on labour should be free of tax, and later yesterday morning, he made his proposals for income tax reform, most of which will, again, be of significant benefit to the wealthy, and none of which address most of the real problems with that tax.
I thought an example of what Dan is proposing on capital gains and the taxation of investment income might be of benefit.
Firstly, suppose a person made an investment of £1,054,000 in a business in 1990.
Secondly, assume that the normal rate of return is 4 per cent.
Thirdly, assume that in 2024, 35 years later, they sold the investment for £4 million.
If I was now setting an exam question, I would ask you to calculate the tax owing using Neidle's proposed system of taxing capital gains.
I will save you that effort, though; that entire gain of £2,946,000 would be tax-free under Dan Neidle's proposal, with the rate of return being 4 per cent, compounded, throughout.
Then, I might ask a follow-up question.
Now presume that the person making this tax-free sale invested the proceeds at 4 per cent, earning £160,000 a year. Now, calculate the tax due on that using Dan Neidle's method of calculating tax due on investment income.
That 4% return would be a "normal rate of return", according to Dan, and so under his proposal, that income would be entirely tax-free.
Now let's look at the situation of a person who is paid £36,000 a year (near enough, the median wage). They have a student loan and make a very standard pension contribution. The government PAYE simulation for this year says they will pay:
I treat the student loan repayment as tax, for the very obvious reason that it is calculated as if it is, so we are entitled to assume it is what it looks to be. In that case, the total tax paid by this person with income of £36,000 would be £7,332.
In comparison, assuming the capital gain was made at the start of the tax year in the example I have given above, that person would have an income of £2,946,000 plus £160,000 of interest, or £3,106,000 in all, and they would pay nothing in tax, at all.
This is not what tax justice looks like.
There is nothing even remotely reasonable about what Dan Neidle is proposing unless you are very wealthy, of course.
But I should add that what Dan is proposing is not his own work. He is promoting the ideas in the 2011 Mirrlees Review of taxation in the UK that was promoted and published by the Institute for Fiscal Studies. In chapter 13 of the 2011 version of this (there was a preliminary publication in 2010), it was argued:
By sacrificing consumption today, saving is a way of generating future income and, like other forms of investment, there is a case for exempting the normal return. The taxation of the normal return to savings distorts the timing of lifetime consumption and labour supply. A timing-neutral tax system would not create such distortions, and there are a number of tax systems that achieve such neutrality.
On the basis of this crass assumption, it is claimed that a person is entitled to a tax-free normal rate of return on their investment, however big it might be.
The trouble is that savings are not a way of generating future income. Banks do not lend money deposited, and almost all other savings are in the stock market casino, which does not use the funds entrusted to it to fund investment but instead uses them to fund speculation. The supposed theoretical justification for Neidle's proposal does not exist.
When it comes to gains, the argument for exempting the normal return in these is to be found in chapter 15 of the same work, where this is said:
Taxing the stock of accumulated savings is closely related to taxing the returns to savings, and raises many of the same issues. We have already argued in favour of exempting a ‘normal' return to savings but taxing ‘excess' returns. A tax on the stock of accumulated savings does the opposite of this.
Therefore, they say that normal returns to accumulated savings - or capital gains - should also be exempt from tax. For the same reason that they were wrong on income-related returns, they are also wrong on capital gains.
But Neidle has not noticed that any more than the supposedly objective gods of modern economics, the IFS, did.
I will quote James Baldwin in case objections are raised. He once said, very appropriately:
I can't believe what you say, because I see what you do.
A tax system based on utterly false economic assumptions that lead to the returns to the wealthy going untaxed in almost unlimited amounts is not even a vague approximation to tax justice: it would be a system rigged in favour of the already wealthy. And that is what Dan Neidle is suggesting, whatever he might say.
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I’ve followed Dan Neidle since his public service to collar Nadhim Zahawi and some of his tax proposals are certainly better than others. A consequence of following him that is most unfortunate is seeing posts from an army of sabre rattling wealth managers who try to make arguments that boil down to “the rich should pay less tax because they take risk/as a thank you for creating jobs.”
I think when it comes to capital gains on investments, I think there is a reasonable argument to be made that if someone invests in an unlisted, illiquid new business where they have no involvement in the management that this might be a good idea to encourage people to support start ups. In every other scenario the investment risk is much lower and there is no justification for what Dan is proposing. The idea someone could invest millions in companies like Taylor Wimpey and not pay tax on the normal rate of return seems ridiculous to me.
However, in defence of Dan I don’t think his tax proposals can be seen in isolation. He has done a lot of good work to highlight the absurd marginal rates people pay as they come off universal credit, have children, take out student loans etc.
Some of Dan’s work is good, I agree. His work on the Post Offce, for example.
But most of his tax proposals reveal his bias.
I used the James Baldwin quote for a reason.
With Dan, I think the other side might well use the same James Baldwin quote. I’m on the fence until I can work him out but at the moment he seems to be a guy who understands the law but not the economics.
I knew him – vaguely – before he became well known to the general public and he did do some good work training employers like mine on their responsibilities to be more than passive in preventing clients from evading or aggressively avoiding tax. But his “circle” is definitely bankers, wealth managers etc at the moment and his expertise is definitely the law and not the economics.
I think he could be won over with the right outreach.
That seems sewn up to me.
I had big hopes for Dan.
But if you still believe in trickle down or that wealth – no matter how it is accumulated – somehow deserves money accruing to it in perpetuity – well what do we expect in all honesty.
“Indexation allowance” or “tax free fair return” are all attempts to protect the interests of (non-income generating) asset owners.
In your example, suppose your investor had invested £1mm 35 years ago and taken a 4% dividend on their investment over that time. They would pay tax on this at (say) 25% to give a return over the period of 3% per annum. Why should the investor that chooses not to take a dividend receive more than this? If they pay Capital Gains tax on the sale at 25% then the tax bill would (in round numbers, give/take some compounding/time value of money) deliver a 3% per annum return over the 35 years. That seems fair to me – equal returns for equal risk that does not discriminate in favour of those that can manage without drawing income.
Would raising CGT stifle investment? As you observe, in the real world nobody says “wow, after tax returns are low – let’s go and buy a Porsche” they say “After I have bought all that I need/want I can save £X – now, what should I invest in”. What we want is for the “what do I invest in” not be distorted by tax policy.
What about foreign investors? Well, tax paid in the UK will be offset against their local tax bill. Or the asset in the UK can be owned via the asset management industry that will avoid most tax (which is another complicated/knotty issue).
In short, the “scare” and “unfair” stories don’t stand up.
Much to agree with
While I appreciate your analysis of Dan’s (Mirrlees Review) proposal it is, in my opinion, an interesting proposal that capital gain should only be gain above the normal rate of return (could be restated as inflation rate or bank interest rate) . Using the figures you give the investor actually makes no money (gain) if the normal rate of return is the same or less than inflation. The fact that after 35 years you could take the ‘gain’ and reinvest/save that money, again at the normal rate of return seems to be irrelevant. Now I agree that comparing this to a standard income/tax calculation makes it look unfair and it would be hard to apply a normal rate of return to PAYE. However if one started down this road of discounting normal rate of return then it would have implications to many things such as house price rises, normal savings, pay and pensions. It seems to me (and I agree this may be somewhat naive) that the tax would still have to come in and political standpoints would still influence the way other taxes were used to rebalance actual overall income/wealth so maybe little would change in effect. The underlying principle that tax on gain should be tax on gain and as such that should only be levied on actual gain not standing still. The implications of applying that principle across the board would be far reaching and disruptive in the extreme but not necessarily wrong or unproductive.
You are arguing for maintaining the statuys quo. Why?
I hope to publish more on this tomorrow.
Why the particular beef with Dan Neidle about reforming CGT so that the rate is higher but only on returns above normal (whatever that is, presumably government bonds or inflation rates).
This is a mainstream proposal which he didn’t originate. Mirrlees, Dan Goss, Emma Chamberlain, Andy Summers, Arun Advani and many others have been recommending a rise in CGT to mirror income tax rates but with some form of indexation of which this is one.
I just don’t get the focus on one guy.
Play the ball and not the man, I’d say, and figure out if the part about “distorts the timing of lifetime consumption and labour supply” is important. The number of people in the 55-67 age range with high level skills who are retired might be what is meant. If they’re not disable we would like them to be economically active, and to be so in the UK rather than UAE or Brazil.
You are playinmg the people of this country with your far-right support for these proposals, which themselves are deeply embedded in the politics of maintaining the existing political and economic power structures of this country. I will provide evidence to suoppiort that tomorrow, I suspect.
The “normal return” argument is so preposterous, and I suspect evidence free, that I’m surprised anyone could take it seriously. But even if there were some evidence it is more important that the tax regime treats all taxpayers fairly and doesn’t favour the rich. In too many ways tax policy favours the wealthy – whether it’s pension contributions, ISA’s or capital gains or the creation of loopholes such as with farmland.
In any case, it’s often the State which ends up shouldering the burden of financial risk taking and subsequent failure, as with the banks or where workers lose their jobs.
It’s also the State that takes the ultimate risk – remember what happened in 2008 and who got bailed, plus look what happened to us afterwards – austerity from 2010.
But what is disappointing is that Neidle seems to believe in trickle down. As a tax lawyer he knows which direction the flows he advises on run, for sure.
So what is the solution for income tax and the personal allowance?
Are you looking at publishing proposals, similar to the taxing wealth report?
I have
They are in the Taxing Wealth Report 2024
I’m probably being very naive and simplistic, but doesn’t this all come down to the issue of investment income being treated as if it is not really income.
Someone above mentions the income tax personal allowance as if that means investment income should also have a personal allowance too.
[…] issues that I have raised with Dan Neidle's tax proposals appear to continue to attract interest. In particular, there are some commentators who seem to be […]