David Gauke MP
I am writing with a proposal on how you can amend CGT in line with Coalition government objectives. I understand your wish to tax short term gains as income, to prevent conversion of income into capital and to ensure short term traders and speculators pay their fair share of tax. I also appreciate the Coalition’s need for more revenues overall. The government has said it wishes to assist a substantial private sector led revival, and wants to see the enterprise sector create more jobs and homes for rent. The government needs a policy which allows reasonable freedom for people to invest, encourages those who are responsible and who make provison for their families and their futures, and is fair.
I suggest that you tax gains of under one year as income. I would suggest you tax them at 40% for higher rate payers, as I understand the 50% rate is a temporary measure. Were you to use the 50% rate it would need to be clear that you intend to go back to 40% for both Income and Capital Gains as soon as possible.
There is some suggestion that longer term gains should also be taxed at 40% with reliefs for business assets. This would deal with one of more damaging features of a high CGT rate regime, allowing entrepreneurs to set up and grow businesses which they can subsequently sell without paying a penalty rate. However it would leave long term savers, people owning buy to let properties, and people with savings for retirement which are not held within a pension fund having to pay substantial tax. This would include paying tax on inflation. Under previous CGT regimes people were allowed to deduct the inflationary element of the gain from the taxable amount. This Indexation allowance was removed in return for a much lower overall rate. It would be unfair to ignore this in a new scheme.
A big increase in the overall rate could well damage the revenue. The US and UK have both shown in the past that raising CGT rates cuts revenue. In the case of the USA where the figures are not affected by other changes to the tax base the figures are dramatic.In 1981 the US collected $28.5 billion with a tax rate of 24%. In 1982 they raised $26.95 billion with a lower 20% rate, only to see receipts soar to $37.85 bn the next year and as high as $97.33 billion in 1986.
In 1987 they raised the rate to 28%. Revenue plunged to $59.83 billion. They raised it again to 33%. Revenue briefly rose to $66.23 billion in 1988 then plunged again to $57.3billion, lower than when the rate was 28% and well below the levels when they had a 20% rate. In 2002 they raised $55 billion with a 20% rate. In 2004 this soared to $78 billion by lowering the rate to 15%. In 2006 they were bringing in $110 billion at the 15% rate.
I therefore suggest that longer term gains should be taxed at lower rates. If you taxed 2 year gains at 30% and three year gains at 20%, higher rates than the current one, you could tax gains of four years or more at 10%. This should increase the total revenues from CGT by the second year, and offer a stimulus to longer term investment. I would myself go further and offer no capital gains after five years, to send a strong signal to the world’s investors that the UK is back in business as a favourable location.
I have been swamped with support for these suggestions, both from around the country and from Conservative MPs. It would send a strange signal if a Lib/Con government decided to more than double the CGT rate set by a Labour government. It would damage the revenues and be unfair to anyone who saves, is prudent, or who ventures their money for the greater good. We should remember that competitor countries including Singapore, Hong Kong, and Switzerland impose no CGT at all.
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