...a blog by Richard Flowers

Friday, June 18, 2010

Day 3456: A Tax on Gains is a Capital Idea


Must answer my TWITTER correspondence…

@millenniumdome: "#HoTVote Returning the CGT rate to 40% is a sensible way of raising money from the better off to use to increase the personal allowance"

@jazzifull: "Raising #CGT to raise money for any other purpose is simply a way to disincentivise personal responsibility for omes future."

@millenniumdome: "no, it's a disincentive to pretending income is "capital gain"; if people keep more of their income how is that irresponsible?"

@jazzifull: "Playing Robin Hood! How do you think capital gain comes about? Money tree in garden? Investment by individuals, it costs!"

Arrgh! Need more characters! Must resort to a diary entry…

I'm going to take this point by point, just not necessarily in the same order because I'll leave the DIFFICULT bit to last ('cos I get a bit PHILOSOPHICAL in reply to Mr Jazzifull getting a bit INSULTING.)

But first, there's an UNDERLYING sense to most of the objections to the proposed rise in Capital Gains Tax of:
"How dare you put up taxes! Lowering income tax? LALALALA CAN'T HEAR YOU!"
IF you want the government to do stuff – and because I'm a LIBERAL elephant, not a LIBERTARIAN kitten, I DO think that there are some good things that governments can do – then you have to accept that you're going to have to raise tax from SOMEWHERE.

(Well, of course, Hard Labour had the idea that they could just INVENT money from somewhere, or at least that they could ALWAYS run up more debts in our name, but at some point we're all going to have to pay back the money that they spent on our credit cards…)

So if you agree that you have to raise SOME tax, it becomes a question of where it is FAIREST to raise that tax from: from everyone, regardless of how low they come on the earnings scale? Or from better off people who are better able to shoulder the burden?

The WHOLE POINT of the Liberal Democrat policy – and we were completely upfront about this – was to REBALANCE the tax system, so that people who are well off pay a FAIR share.

You remember the story that Rich City Slickers are getting a LOWER rate of tax than the people who clean their offices? That's because of Capital Gains Tax.


First point first:

"Playing Robin Hood"

Yup, happy to put my fluffy feet up to that one. It was ALWAYS the Liberal Democrat plan to try to move some of the burden of taxation from the general taxpayer to the better off, particularly with an aim of taking people on the lowest earnings out of tax altogether.

Very few people pay capital gains tax. Almost everyone in work pays income tax. Raising the personal allowance lets more people keep more of their own money and take more personal responsibility.

Thanks to Hard Labour running up a trillion pound overdraft, none of us get the option to opt out; we've got to raise the taxes from somewhere. I'd rather they were raised more FAIRLY.

And with the AUSTERITY budget that is coming, giving a generous tax cut to most workers, paid for by tax rises on those who could afford it, was our way of saying "we are all in this together".

Third point second:

"Investment by individuals, it costs!"

You do realise that Capital Gains Tax is a tax on GAINS, not on Capital, don't you?

You ONLY pay the tax when you have money to pay it. It's not like COUNCIL TAX (or the TV licence) where you have to pay it whether you've got the cash or not; you're ONLY liable to the tax if you make a profit on selling stuff.

It's not a tax on your HOME; your home is exempt.

It's not a tax on SELLING stuff (like VAT); you only pay the tax if you sell stuff for MORE than you paid for it and then you only pay the tax on the bit more that you get when you sell it. Whatever you put in in the first place – like on "Bullseye" – that money is SAFE.

And, in fact, if you know ANYTHING AT ALL about the way that Capital Gains Tax works you will know that there is a WHOPPING great tax exemption called "Entrepreneurs' Relief" that means that if you spend your life building up a business and then sell it, the first ONE MILLION POUNDS of the profit (yes, that's the PROFIT not the sales price) is tax free.

Think about it like this: suppose you've worked hard to build up a business – the people WORKING in your business, they're working hard too, and they get taxed on the reward for their hard work after the first six thousand pounds. You SELL the business and you get taxed on the reward for your hard work after the first MILLION pounds.


In order to raise allowances, if we can, so that we only tax your workers after the first ten thousand they earn, we want to tax you only at the SAME rate that they pay on their earnings.

Is that not FAIR?

So, perhaps a little less BLEATING about how it "disincentivises" people from investing in businesses that will create jobs.

You could by the same argument say that INCOME tax "disincentivises" people from working, particularly at lower incomes where people may even calculate that they are better off on benefits.

A fairer balance between taxing gains and taxing wages could encourage people to take jobs so that employers benefit too.

Capital Gains Tax is a tax that falls MAINLY on people rich enough to be able to buy and sell stocks and shares (or buy-to-let second homes) and taxes them mainly FOR buying and selling stocks and shares (etc).

As we shall see…

Finally, second (and insulting) point last:

"How do you think capital gain comes about? Money tree in garden?"

Well, at the most SIMPLISTIC level, ALL gains – capital or otherwise – come from someone putting something into an opportunity and getting something back.

Now, that COULD be as simple as putting in some of your LABOUR into a JOB and getting PAID.

Or you could put in MONEY into an INVESTMENT and get a RETURN.

Of course, ultimately all MONEY must represent LABOUR at some point. Just not necessarily YOUR labour ('cos you might have INHERITED it).

It could be that was the labour of making something to sell, or growing something to eat or digging stuff out of the ground.

Or maybe the labour could be the labour of calling yourself "king" and killing anyone who objects to paying you protection money.


Most "value" comes by exploiting the Earth somehow – only writers, artists, musicians, poets truly create something of value out of nothing, and even THEY need something to write or paint ON (not to mention something to EAT!) – so in a sense there IS a "money tree in the garden"; the "money" represents how much effort you've put into collecting the "fruit" of that "tree".

Though of course the suggestion was that I thought money came free from nowhere. Which is really only true of rich people with inherited fortunes. The sort of people who are most likely to be paying Capital Gains Tax on their Trust Funds, as it happens.


You get your money (somehow) and put it into a BUSINESS and get a RETURN. Or you could put your money into BUYING SOMETHING that will go up in value and make a PROFIT when you sell it.

That would be something like stocks and shares or gold or land or property or art. Stuff, basically. Because, obviously, MOST of the gains that Capital Gains Tax taxes are made on buying and selling stuff.

Now, you could be UNKIND and call "buying stuff in the hope that it goes up in price so you can sell it for more than you paid" GAMBLING. But even if you are being generous, "buying things to sell them" is really just a SAVINGS PLAN for RICH PEOPLE.

If you put a thousand pounds in a savings account, a year later you still have your thousand pounds PLUS you have some INTEREST. You pay INCOME TAX on the INTEREST at the basic (20%) or higher (40%) or even top (50%) rate.

If you put a thousand pounds into SHARES and sell them a year later, you MAY have your thousand pounds back PLUS some PROFIT (if the price has gone UP; if it went down, then why did you sell the shares?) You pay CAPITAL GAINS TAX on the PROFIT at the capital gains tax rate of 18%.

Basically, both are INVESTMENTS where you put in some money and get a bit more back, and you pay tax on the "bit more" that you get back.

So why is the gain on the stock market investment taxed at a lower rate than the gain on the savings account?

Obviously, there IS a DIFFERENCE between these two kinds of INVESTMENT. And the difference is that the buying stuff plan has MORE RISK: that's why some people call it GAMBLING.

If you put money in the bank, you are pretty certain to get it back again with interest. So the interest rate will be quite LOW. Putting money into shares is more risky because (as the advert has it) the price CAN go down as well as up. But in the long term, so long as you can afford to keep your money parked in the investment, the stock market USUALLY goes up more, so you get a higher "return" than just a savings account.

And remember, boys and girls: RISKY investing is what led DIRECTLY to the credit crunch and worldwide recession. Are you 100% sure you want your government to be encouraging risky investing?

So why is the gain on the RISKY investment taxed at a lower rate than the gain on the SAFER one?

In FACT, Capital Gains have only been taxed at 18% for the last couple of years. Before that, quite sensibly, the CGT rate was similar to the income tax rate. The REASON that the rate was LOWERED was mainly because Mr Frown caused a MASSIVE RECESSION and STOCK MARKET CRASH and so wanted to encourage people to reinvest in the stock market.

I say "mainly" because it was also to do with Mr Frown's messing up the tax in the first place: a long time ago, you USED to get a allowance for INFLATION deducted from any gain that you made so you only paid tax on the money you made "in real terms". But Mr Frown thought he'd ABOLISHED inflation so he got rid of that allowance, and tried to bring in a "taper" relief instead, so that the tax got less the longer you owned the whatever-it-was. But that all got far too complicated and didn't work properly so he abolished that as well and just made the tax lower.

But this creates a massive LOOPHOLE so that if you are rich enough to get paid in ASSETS instead of CASH – like, say, city bankers – you can get your "salary" in shares and then sell them and so only get taxed at 18% instead of 40% of 50%. Which leads to the SHOCKING business of fat cats paying a lower rate of tax than the people who clean their big shiny offices.

So why is there a loophole open to the rich to get their earning taxed at a lower rate than the rate that the rest of us have to stump up?

So, to sum up, the answer is YES, Mr Jazzifull, I DO know where gains come from (possibly better than you); I DO know how they are taxed (probably better than you); and I know why it's FAIRER for the tax – thank you again Hard Labour debts – to fall on the better off, which is why I know we should switch from taxing income to taxing gains if we can (certainly better than you).

Is that what Master Gideon is going to do in his budget next week?

Well, no, I'm rather afraid that he won't. Because I'm afraid he's an idiot probably going to raise the wretched VAT rate.

The Liberal Democrat plan was to cut the deficit by cutting spending; to NOT increase or decrease the total tax taken (except for adding a Bank levy), just change the balance of taxes to try and be more fair.

But we have got to COMPROMISE now, in order to make the Coalition WORK. And the Conservatories plans include cutting the deficit by a MIX of spending cuts and tax rises. They have agreed to use the Liberal Democrat plans for a Capital Gains Tax rise, but I do not think that they will be raising the personal income tax allowance all the way to ten thousand pounds all at once as we had hoped (making this a tax RISE not tax NEUTRAL). And then there's the VAT.

A VAT rise is a MUCH WORSE idea because (a) it is REGRESSIVE, impacting more on people who have less (though the zero rate for food, and rent being exempt – and mortgages outside the scope – means that at least there is protection for the very worst off); and (b) whereas reversing an income tax rise is easy and has a direct benefit to the taxpayer, reversing VAT rises doesn't tend to get passed on to customers – as we saw last year when Hard Labour cut VAT back to 15% – and so you get stuck with a tax that only ever goes UP.

I am SURE that we will have argued AGAINST it, but it is an argument that we may have lost. And so, I'm afraid, we're going to have to LUMP it.

Arguments about Capital Gains Tax may exercise the more frothing members on the right wing. But VAT hits far more people, and so VAT – not Capital Gains – is going to be the REAL first test of the Coalition.

Hang on tight, fluffy chums, this could get NASTY!



Unknown said...

Another fantastic post.

I did one of my own yesterday saying that the Budget may not be as bad as Labour and the press say, but not as good as we want because our 2 policies designed to be implemented together, of removing tax credits from higher earners and raising tax threshold to £10,000, may not be and this might leave some at the lower end of the scale worse off.

The CGT changes are an important part of balancing the raising of the tax threshold and may have been scuppered or diluted by the torygraph and Tory MPs - but we'll get the blame for a budget that's worse than we intended.

innerbrat said...

I have given you an award, Mr. Millenium.