During the run up to the Coalition budget I argued that increasing the CGT rate would not yield more revenue. Some Lib Dems wanted the rate raised to 40% or even 50%. The Chancelllor listened to the arguments, and decided on 28%. He said in his Budget speech that any higher rate was likely to lead to lower revenues. He had accepted the Laffer curve argument, the argument that if you raise the rate too high fewer gains are taken, and fewer rich companies and people come here or venture money here to make gains.
So far so good, you might say. The only problem is, I do not believe that 28% is the optimum rate for CGT. History and past experience suggests revenues are maximised at rates below 20%. Maybe Labour was right in choosing 18% as a good rate for CGT. The Treasury, I was told, was pretty sure 28% was the optimum rate, the magic level at which revenue was maximised.
Imagine my surprise, therefore, when I looked at the detail of the Treasury and OBR’s own forecasts following the Budget. There quite clearly shown, is a fall of £500 million or 15% in CGT receipts next year compared with this. It takes more than a year for the full effects of a new CGT rate to come in, given the lags in selling the assets, reporting the gains and then paying the tax. So the official forecasters themselves accept that 28% is not an optimum rate . They reckon the higher rate will cost the Treasury £500 million of lost revenue in the first full year. If the rate stayed the same, there presumably would have been no such drop off in tax revenue, given the fact that the economy is forecast to grow and company and London property asset values are likely to rise.
The government needs more revenue to meet its large spending requirements. It cannot afford the £500 million CGT revenue drop next year. So why not take the rate back down to the Labour level, a level likely to increase the receipts? The way to tax the rich more, is to set competitive rates which attracts them here and gets them paying tax in the first place.
The same is probably true of the new higher rate of Income Tax. Throughout most of its period in office Labour wisely stuck with the Conservative’s top rate of Income Tax of 40%. When first set, this was a very competitive rate which attracted businesses to the Uk with high earning employees. In more recent years many other countries have lowered their top Income Tax rates, making the UK less enticing. The increase to 50% has done damage and is doing damage. It is probably losing the UK revenue. Again, the government should want to tax the rich more by setting a competitive rate. If they reverted to the old cross party 40% top rate they could well raise more revenue.
Such reductions, though restoring Labour rates of tax and bringing in more revenue, would doubtless be attacked as helping the rich by the Labour opposition. No amount of explaining that the aim is make the rich pay more will assuage them. So the Coalition could at the same time take more people out of tax at the other end of the income scale. It could also renew or extend its Council Tax freeze, as this tax hits lower income families hard if they are not on benefits.
The government should also look at the impact business rates are having. Empty property rates can tip a business over the edge. The present level of business rates is part of the problem on the High Streets, where retailers find it difficult to cover all their costs from current levels of trading.
The government needs to tailor a package of tax cuts which help recovery and support business, without costing too much lost revenue. In some cases the tax “cuts” are a no brainer, as they should yield extra revenue.