Dominic Lawson: Behind the mask and hype, a humiliating reverse

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There is no obvious physical resemblance, but in one respect, at least, Alistair Darling reminds me of the late Emperor Hirohito. Announcing his country's surrender to the Allies after the destruction of Hiroshima and Nagasaki, Hirohito told his people in a radio broadcast: "The war situation has developed in a way that is not necessarily to Japan's advantage."

Our Chancellor of the Exchequer has an imperturbability redolent of the Imperial Japanese court, and a similar ability to present humiliating reversal with eerie calmness. Yesterday in the House of Commons he announced in his usual deadpan manner the biggest climbdown from a Chancellor's budget tax proposals that any MP can remember.

The fact remains, however, that Mr Darling has had to grovel before Britain's small businessmen (a welcome inversion of the usual relationship) and grant them a significant exemption to the Capital Gains Tax proposals outlined in the pre-Budget report. It is true that the concession – a reduction from the previously announced 18 per cent, to 10 per cent, in the CGT payable on the sale of assets – applies only up to £1m over the course of any individual's lifetime; but that will still concede about a quarter of the money that the Chancellor had hoped to raise from the changes he had announced last October.

The Government has at least managed this reversal with its usual skill in manipulating an announcement ahead of its presentation to Parliament. The press seem to have been given the story that the exemption would cover only the first £750,000 of profits, so that when the real figure was officially announced the next day, everyone affected would feel duly grateful.

I doubt, on this occasion, that gratefulness will be the prevailing emotion: it verges on the incredible that it should have taken the Government more than three months to address the complaints over its ill-thought-out proposals, originally designed to appease public outrage over the low tax rates paid by private equity firms on so-called "carried interest".

The private equity firms have huffed and puffed in public about the removal of the old "tapered" 10 per cent capital gains tax and its replacement with a simple and single tax of 18 per cent. In private the venture capitalists were delighted that Mr Darling had not taken a much more brutal approach, and declared that their rewards should in future be treated as income, and thus taxed at 40 per cent.

It is true that this would have meant tearing up a memorandum of understanding drawn up in 2003 between the British Venture Capital Association and HM Treasury. Gordon Brown was then Chancellor, and the co-founder of the BVCA was Sir Ronald Cohen, a friend and supporter of Mr Brown; read into that what you will

Alistair Darling's supposed reform of this system failed to achieve any sensible political objective, however. It left the venture capitalists still enjoying an effective tax rate which infuriates the trade unions and the left in general, while enraging the small businessmen who were always seen as the intended beneficiaries of low taxes on capital gains.

Perhaps it was a case of one blunder leading inexorably to another. This was the budget in which Labour, apparently on the verge of declaring a general election, panicked over George Osborne's dramatic proposal to remove inheritance taxes from all estates under £1m, and announced a similar cut themselves. Not only did this make Labour appear to be driven by the Conservatives' agenda, but Darling had to find a way of raising the money: the short straw was allocated to those who pay capital gains tax.

Presumably this seemed just, since these were the same sort of people who would benefit from the reductions in inheritance tax, but Alistair Darling has learnt the hard way what all Chancellors discover: the howls of pain over tax increases are always much louder than the expressions of gratitude over any reductions of similar size.

I doubt, however, that a Conservative Chancellor would have yielded an inch to business lobbyists, in the way that Alistair Darling has just done. It is one of the peculiarities of modern British politics – and this is Tony Blair's legacy – that each of the two main parties is much more anxious to appease its natural enemies rather than its traditional friends. So New Labour will do anything other than offend business, while the Conservatives give support to those marching in protest against a tight public sector pay round.

George Osborne, for example, indicated a few months ago that he thought some of the biggest private equity financiers had been abusing the capital gains tax system: he declared that "What looks like income should be taxed as income."

It was, after all, a Tory Chancellor, Selwyn Lloyd, who introduced in 1962 what has come to be known as capital gains tax. Previously it had been considered sufficient to tax business owners on whatever profits they made every year, without also demanding they pay again when selling the equity they had acquired.

Those were innocent days before the creation of firms whose only business is the buying and selling of other businesses. It may be that these firms are themselves about to become the vulnerable dinosaurs of the financial sector: the credit crunch is blowing the private equity business model to pieces. We can expect Mr Darling to greet the ensuing chaos with his accustomed oriental calm.

d.lawson@independent.co.uk

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