It was widely presumed that the first shrieks of popular anger under a David Cameron-led Government in an age of sharp fiscal austerity would come from the less well-off. Instead, in another sign of how this coalition has shaken up British politics, those cries are emanating from the wealthy. The object of their ire is the coalition Government's proposals to bring Capital Gains Tax into line with income tax rates.
Most of the protests are special pleading and can be safely ignored. People, understandably, do not like the idea of paying more tax on the sale of their second homes and shares. Who would? But the case for the state taxing tax wealth and income equally is powerful. Privileging one over the other is unfair and economically distorting.
The argument that has been advanced in some quarters is that the primary victims of this tax hike will be those of modest means. This is unconvincing. The relaxation of Capital Gains Tax in recent years has encouraged tax avoidance by wealthy individuals who, with the help of clever accountants, have been able to convert their income into capital gains and make themselves liable for the lower rate. This was vividly exposed by the private equity chief who, a few years ago, remarked that he was subject to a lower rate of tax than his cleaner. It is these sort of privileged individuals who stand to lose out most from this tax rise. And since the proceeds of this tax rise will be used to raise the lower income tax threshold, it is the less well-off (including cleaners) and those on middle incomes who stand to benefit most.
Another complaint about the planned move is that entrepreneurs who set up businesses with the expectation of selling them on at some stage in the future will be penalised by moving the two tax rates into line. But a significantly lower rate of capital gains tax for business is hardly some ancient right. As recently as 1988, under a Conservative government, capital gains tax was in line with income tax rates.
This is a context that those kicking up a fuss over the planned readjustment, particularly those on the Tory backbenches, prefer not to acknowledge. These Conservative backwoodsmen also tend to ignore the fact that it was the previous "high-taxing" Labour administration that began to make the Capital Gains Tax allowance system excessively generous in 1998, before eventually imposing an 18 per cent flat rate two years ago.
The serious question in this debate is not whether Capital Gains Tax ought to increase, but whether it should be tapered once again to reward those who hold assets for the long term. A secondary question is whether businesses should be taxed less than property and shares. It is amusing to see those who claim to want a "simplification" of the tax system pressing for the return of this complex system of allowances. It would appear that when they say they want taxation to be "simpler" what they really mean is "lower". And when they demand "tax cuts" what they really mean is tax cuts for the already prosperous middle classes.
That said, there is a case for preferential tax rates for those who establish businesses. Entrepreneurs will play a crucial role in reinvigorating our weak economy. Yet, as we have seen, excessive tapering in Capital Gains Tax creates loopholes. And the more tapering there is in the system, the further one moves from the desirable principle of treating wealth and income equally in the tax system.
There is probably room for compromise to ensure that appropriate incentives are in place for entrepreneurs. But, on all other fronts, the coalition Government must hold its nerve in the face of this barrage of fallacious argument and barefaced hypocrisy.Reuse content