Expert View: What's simple, Darling, is that raising the tax burden isn't fair

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The Independent Online

Three hearty cheers for the Chancellor. Alistair Darling has committed the Government to simplifying the tax system. Let's hope he follows through; his predecessor did the opposite for 10 years. Darling is restricting himself to the areas of raising revenue, delivering fair outcomes for taxpayers and supporting wider government objectives such as enterprise, social welfare and the environment. His rules, not mine, but they seem sensible limitations in case he has a rush of blood to the head.

So how has he done with his first initiative – the change to a flat 18 per cent capital gains tax (CGT)? He has certainly simplified the system: one rate for everyone, on everything, at any time. Thousands of lines of tax law will be rubbed out, so 10 out of 10 for delivering on his pledge. But has he stayed within his own rules?

He is raising revenue: his new, simple system increases the tax burden by £350m, £750m and £900m, respectively, in the first three years. So full marks on this score and maybe his master will give him a bonus point for increasing the tax take stealthily.

And what of fair outcomes for taxpayers? The Chancellor described the new regime as sustainable. What he meant was that he could not introduce a tax on private equity without calling it a tax on private equity – that would have been too uncomfortable politically. But he could sustain a position for the benefit of the unions that he had increased tax on the private equity locusts from 10 to 18 per cent, and, while also saying he had reduced the rate for all the other good folk from 40 to 18 per cent.

But has he really achieved fairness? What about those who have been entitled to indexation allowance since 1982 – a relief that almost doubles the acquisition cost of assets for the purpose of working out taxable gains? The effect of the withdrawal of the allowance is that of a retrospective tax, and that is never fair.

Entrepreneurs and managers with share incentives are also badly treated by the increase, which is in effect backdated, as they will pay 80 per cent (yes, 10 per cent up to 18 per cent is a rise of 80 per cent) more tax than they had bargained for when they opted to take a gamble on their companies' shares doing well in the future, rather than sticking with a salary.

If Mr Darling had been honest, he would have said he was increasing tax by 80 per cent on entrepreneurs in order to make tax more simple and to raise more revenue. And at the same time, he could have said he was cutting tax by 55 per cent (40 per cent down to 18 per cent) on second-home owners, day traders in shares and other short- term speculators on the stock markets to make our system sustainable and competitive. He would have been booed out of the Commons by both sides of the political divide had he made such a statement.

The only nod to fairness is that the Chancellor has said the new regime will not come into effect until April 2008, so leaving some time for those who can realise their gains under the current 10 per cent regime to do so.

All of which leads on to the third point: using taxes to support government objectives. I have never believed taxes can be used as a means of altering behaviour. But that's what Gordon Brown must have thought when he introduced taper relief with the aim of encouraging enterprise. And he might even have claimed credit for helping to create the greatest private equity industry outside the US by his wise move on low tax.

So what has changed? If low CGT through taper relief was thought by the Government to encourage enterprise in 1998, surely the same must be true today? It would seem to follow the Government now doesn't think it is worth encouraging entrepreneurs any more than second-home owners. While low tax might not turn people into entrepreneurs, hugely increasing their tax burden doesn't half hack them off. Add to that the incentive to turn income taxable at 40 per cent into capital gains taxable at 18 per cent on any asset held for any length of time and we have a recipe for avoidance.

My bet is that CGT will be changed again, and fairly soon.

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