Raising capital gains tax would be a big mistake
CityAM’s consistent warning that the government will raise taxes in their first Budget have been vindicated. Rachel Reeves admitted that “I think we will have to increase taxes” to the News Agents podcast.
Labour will no doubt rebut accusations that this is a violation of their election pledges with references to their weaselly caveat about ‘working people’. That is utterly spurious. The tax system ultimately affects everyone, regardless of employment status. What they really mean is that they will raise those taxes that their voters believe someone else will pay.
CityAM readers don’t need to be reminded that one of the most likely candidates is capital gains tax (CGT). Indeed the likelihood of a CGT hike is now so widely acknowledged that it is already distorting the market, with wealth managers reporting widespread sell-offs of UK assets.
This highlights a key problem with predicating any public spending plans on CGT revenue: It is essentially a voluntary tax as people can choose not to sell their assets. Both international comparisons and HMRC forecasts indicate that rate rises reduce returns to the Treasury. But that doesn’t mean individuals and businesses can avoid the harmful impact of this tax.
As a major disincentive to investment, CGT prevents the flow of capital into more productive parts of the economy. This could prove disastrous for the SMEs and entrepreneurs who are significant drivers of growth. No wonder analysts have told this newspaper that such a move would spell “the death of the City and entrepreneurialism”.
Labour won a huge majority on a platform of ‘change’, writing in their manifesto that “the vast chasm between Conservative slogans and reality has shown a contempt for democracy”. If they announce a tax raid with revenues that never materialise, and promise growth while introducing policies to stifle it, they could surely be accused of the same thing.