Should capital and income be taxed at the same level?
In amongst the debate over capital gains tax and the politics of whether the Budget leans more towards the previous Liberal Democrat or Conservative policies on the topic is a significant issue of principle.
The Liberal Democrats (and previously the Liberals in particular) have traditionally been much keener on the idea that the tax system should treat ‘unearned income’ more equally to earned income, and so tax more equally the growth in capital value of assets compared with salaries.
Of course the use of the word ‘unearned’ is itself the trigger for a whole range of debates as increase values of assets may be the result of work and if they flow from people creating and growing businesses the wider economy benefits too.
So: do you believe that as a matter of principle capital gains should generally be taxed at the same level as income?
Feel free to show your working, below …
You may buy an item this year for, say £1000 then exchange it back for £1620 sterling in 10 years.
If inflation has been running at 5%, you will have actually made no gain at all, as it is the money that has lost value not the item increasing in value.
Yet you would be taxed on £620 (assuming you have used your allowance), which is a nominal, not a real gain. So unless CGT becomes index linked again, it might be unfair to raise it, unless you consider it is fair to strip assets from those who have assets.
Another way to look at this is that the price of assets is a zero sum game. When one person earns a pound more, the other spends a pound more. So ultimately, every real pound earned from the nominal price of items changing is matched by a pound lost by the nominal price of items changing. So nett, there are no real capital gains. Simply capital transferrals, and deferments of losses and gains from year to year. Therefore, nett, CGT becomes a tax not on gains, but on asset conversion and transferrals. It acts as a barrier to people making decisions which would otherwise ultimately lead to best utilisation of any UK based asset. In reality, it means that an asset holder will keep hold of the asset until they die, instead of transferring it to someone who can make better use of it, then using the money raised to buy something of greater use.
Essentially, when viewed across the economy as a whole, CGT is no different to moving tax, or stamp duty. It acts as a barrier to asset transferrals. Assuming that both parties are smart, any asset transferral is a benefit to the economy, as the asset transferred will presumably be made better use of, in turn, boosting the economy.
Another risk of raised CGT is that it acts as a perverse incentive for government to have a high inflation economy, again leading to asset transferral freeze.
The fundamental question boils down to: Is it good for the country for individuals to have assets? If the answer is yes, the next question is: Is it good for those assets to be freely tradeable and liquid?
The same question comes to the taxation of savings interest. If the interest rate runs, on average, about the same rate as inflation, any tax on savings would reduce the real value of the savings.
I believe the most equitable and constructive method of taxation is through sales tax for new items and by reducing income tax. This way, we transfer the tax burden from British workers to foreign workers, yet maintain an important pool of assets in Britain, so that people on our shores can back our economy with investment.
The super-rich can and usually do presumably hold and trade assets off-shore away from the revenue authorities. There is nothing the govt can do about that. So CGT, stamp duty and savings interest has the effect of asset-stripping the less-well-off and small business.