During the election campaign, the Labour Party had a strong focus on the importance of economic growth. Part of their explanation for our low rate of growth was that the tax burden was too high. Writing in the Daily Mail, on May 24 Rachel Reeves, then the Shadow Chancellor declared: ‘[Rishi Sunak] will tell you that high taxes and low growth are “normal”. They aren’t.’ She noted that ‘Taxes are at a 70-year high’ and added: ‘I do not believe you can tax and spend your way to growth.’
To make sure we got the message she added: ‘If we are elected to power, I will lead the most pro-growth, pro-business Treasury in our history.’
Only last year, Reeves also told listeners to the Radio 4 Today programme: ‘I don’t have any plans to increase capital gains tax (CGT). There are people who have built up their own businesses who maybe at retirement want to sell that business. They may not have had huge income through their life if they’ve reinvested in their business, but this is their retirement pot of money.’
How things have changed. The Labour Government is now considering an increase in CGT. Such a decision would be an act of fiscal self-harm. The Daily Telegraph quotes Ceri Volkes, a partner who heads the private client and tax team in Europe at Withers, warning: ‘I have got clients who are leaving the UK in order to trigger capital gains taxes at current levels of 20pc on the basis that they feel that the UK has become more hostile towards wealth creators.’
Politically, we can see how hiking CGT would be attractive to Labour. It is a tax on profit and for too many profit is a dirty word. You pay the tax when you sell an asset (such as a property other than your main home) for more than you bought it for. Increases in Income Tax, National Insurance and VAT were already specifically ruled out as more politically sensitive. CGT was only in the ‘no plans’ category. We have learnt to watch out for our wallets when we hear that phrase from a politician’s lips.
The hitch is that the electorally expedient tax increases are the ones most likely to prove counterproductive in terms of revenue. Rich foreigners are an easy target – so toughen up the non-doms rules, even though they could easily relocate to a less hostile environment. Oil companies don’t have much public sympathy – so push up the levy on energy production in the North Sea to 78%, even if it ends up bringing in 78% of nothing and we are dependent on imported energy.
CGT is in this category. The Chancellor can announce at the despatch box how billions extra will flood into the coffers. This will be backed up detailed projections from the Treasury and the OBR. Events will then prove the forecasts wrong, as they ignore, or understate, the ‘dynamic’ impact of behavioural change. Yet the overwhelming international evidence is that cutting CGT tax rates increases revenue. Higher CGT rates result in less money coming into the Treasury. Arthur Laffer’s curve strikes yet again – especially where people don’t need to sell assets at a particular time. But by the time the boring old stats come in of how much tax is actually collected the media have lost interest and the lesson is never learned.
When you consider that most of the supposed ‘gains’ are due to inflation, our CGT regime is already uncompetitive. As a briefing from the Cut My Tax campaign notes:
Although the current CGT rates of 20% and 28% don’t seem that far above Labour’s last rate of 18%, the inflation environment has changed significantly for the worse. For example, the cost of goods and services has risen by 72% since April 2008, so if you sold a £100,000 asset today for £172,000 all of the taxed gain would actually be inflationary. Similarly, Rishi Sunak slashed entrepreneurs’ relief back to £1m. It would need to be £1.7m to match the level set by Labour in 2008.
According to an analysis for the Tax Foundation, the UK’s CGT rate is already higher than the European average. Several countries in Europe don’t impose any tax on assets that have been held for a long time. The more investment is rewarded, the more likely it becomes. The more it is punished the less we are likely to get – especially of the riskier sorts of capital investments. The less investment available, the harder it is for new businesses to start and for existing businesses to expand. If you want a tax increase laser-focused on killing growth, CGT is one to go for.
I was struck by a claim Stephen Fry made on the television the other day that 15 years ago income per head in the UK and the USA was comparable, whereas now the Americans are twice as rich as us. I looked up the World Bank per capita GDP as measured in current US dollars. Naturally, Fry was wrong. But not that wrong. In 2009 we were on $38,744 a head. Last year it was $48,866. In 2009 the Americans were on $47,195. Last year they were $81,695. Brexit has prompted us to focus on comparisons with the EU in recent years – where we have been holding up pretty well. But the comparison with the United States is instructive. I’m sure the lower price of energy they enjoy, thanks to the shale revolution, has been important. But another of the economic fundamentals is that the USA has a lower tax regime than we do. The state there grabs just over a quarter of your money. Here it is just over a third.
Soaking the rich might be popular in the short term. But a higher tax strategy is guaranteed to mean low growth – or no growth given how high the burden already is. Labour has not been in power for long but already they are making some serious mistakes.
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