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.
And so to our latest poll, which you can vote in over in the right hand columns: do you believe that as a matter of principle capital gains should generally be taxed at the same level as income?
And here are your options:
- Yes
- No
- Don’t know
Feel free to show your working, below …
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33 Comments
of course it should, I’m actually shocked it isn’t already! (after all, interests on savings, as little as there is this days, are already taxed at the same rate).
Although I would agree on some sort of exemption/discount for Businesses that actually create something (but not for shares or properties, no matter how long they’ve been held. If CGT on shares was much higher, maybe investors would insist on firms that provide dividends rather than speculation)
No way. Capital is more mobile, so the optimum level of tax for maximising tax income is lower. High CGT discourages transactions that incur CGT far more than income tax discourages work, because CGT isn’t a tax on capital per se, it’s a tax on capital at one particular time of its life cycle.
You are comparing apples with oranges, to some extent. True capital taxes would include taxes on dividends and deposit interests. CGT is more like fining a worker for switching jobs.
I answered in the spirit the question was asked, but my *actual* answer is ‘no, it should be taxed significantly more highly’. Income tax is tax on rewards for contributing something to society, while CGT is a tax on parasitism.
Personally I think that CGT should be closer in rate terms to income tax levels but with a higher ‘allowance’ element than for income taxes and a decent level of taper so that assets that have grown ‘naturally’ over time are taken into account. Remember that (as it stands) CGT on investments assets (e.g. shares received as part of an incentive plan) don’t attract NI so the both rates being the same actually is a ~20% advantage to the company if the rates are the same.
An example :
A person gets 20k income and disposes of 40k in assets that they bought at 10k 5 years ago
Income tax 22% threshold 10k
CGT 22% threshold 20k with a 3% per annum ‘discount’ against value when calculating gain
Income tax paid = £2,200 ((20000-10000)*0.22))
CGT paid = £1,870 (40000-10000-20000)*(1-(0.03*5))*(0.22)
Playing with the numbers and I think that would be ‘acceptable to most people
Can I throw into the equation another thought, I’ve always found VAT to be a strange tax (and bloody difficult to administer and check up on) why don’t we institute a straight forward ‘sales tax’ when the every company just pays HMRC 10% (for example) of its sales that month? It would be easier to calculate, easier to cross check with other taxes and make life easier for everyone.
Of course the value of sales tax chosen would be need to be more scientifically calculated but the precedent already exists with the Flat Rate scheme http://vatreadyreckoner.hmrc.gov.uk/
Of course it shouldn’t
1. Capital gains involve risk. If someone is brave enough to risk starting a new business, they should be rewarded if it works.
2. Capital gains typically include an element of inflation. If you buy an investment and it goes up in value by 30% but inflation over the period was 10%, only the 20% gain should be taxed, not the whole 30%.
3. Capital gains create jobs in a whole range of sectors, and CGT generates relatively little tax. The revenue benefits in raising it in no way match the damage it would do to the economy if long-term capital gains were hit hard.
4. People who focus on capital gains are investors – they look to the long-term, they are careful with money, and typically will reinvest their gains, to the benefit of society.
Having said all this, I have no issue with it rising above 18% but it needs to be done so that long-term gains are favoured – let’s support those who are investing in a way that creates jobs and benefits for everyone.
James Blessing has got it right, in articulating the case for a tax on investment that declines over time. The economy badly needs more people to invest for the longer term. That greatly increases our economic resiliance, the converse of excess borrowing.
People who regard investment income as somehow parasitic clearly have no idea how our economy functions.
Plus think about the hundreds of thousands of good, responsible, self-reliant people who have invested for their future, now living on no earned income, but eeking out a living on their pension and investments. Or, as in my case, unemployed, not claiming benefits, surviving on my investments, accrued over a lifetime of putting a little bit away each month…
Also, this idea that landlords are in some way freeloaders who deliver nothing to society, is nonsense:
1. Landlords create jobs – for gas engineers, tradespeople, letting agents, insurance companies, etc
2. Landlords provide a service, they have customers, and obligations – to maintain safety, to insure the property, to manage tenancies, energy efficiency, and so forth. Landlords are business owners.
@OC Gas engineers, Tradespeople and insurance companies would still have work should the properties be owned.
Any work on Gas after the meter (the demarcation point between the Gas Transporter /supplier and the consumer) MUST be done by a gas safe engineer by law.
Most people’s DIY extends little further than decorating. and insurance is required on all mortgaged properties as a condition of the mortgage (obviously that insurance can be acquired from a company of the homeowner’s choosing).
Letting agents…. hmm but that isn’t really than many jobs.
Landlords are required to maintain energy efficiency? REALLY?
Anyway should CGT be taxed as the same level as Income tax? ABSOLUTELY.
Oh and I agree that CGT should be structured to reward long term investors rather than short termers. Investment should be about the long term.
@Chris – I agree, it should be raised but I do feel that there need to be measures to protect those who hold onto such investments long-term. Oddly enough, so did David Laws – so the Telegraph gunning for him was maybe not have been the best move.
I’ve answered no, because I think unearned income should be taxed more than earned income.
Why is it morally better for investment to be about the long term in some sense? Someone is always going to hold it – a share or a house doesn’t just vanish or end up ownerless. What you do by making short-term investments expensive is that you make it too costly to make a (necessarily risky) investment for anyone but those who can afford risky long-term commitments, that is to say, very large financial institutions and the wealthiest handful of people.
I fear that long-term investments are one of those intuitively appealing ideas that don’t actually stack up to all that.
The obvious point about landlords is that they make it possible for people without long-term investment capital to have houses and apartments to live in.
I too don’t understand why someone who owns a share for 20 years should pay less tax than someone who owns 10 shares for 2 years apiece.
But inflationary gains should not be taxed – that is just silly.
That investment is riskier than work should not matter for tax – on those grounds Grand National winnings should not be taxed at all!!
The obvious point about landlords is that they make it possible for people without long-term investment capital to have houses and apartments to live in.
Yes, and in return they receive rent. This rent is subsidised directly or indirectly by housing benefit. Indirectly because even if the tenants do not receive it, it buoys up the general rental market and acts as a guarantee of the rent being paid. It is thus a VERY hefty state subsidy on being a landlord.
The rent is taxed as income. If it should happen that house prices go up, that is nothing to do with the landlords. Still, it is extra income, all that is being said is why should this extra income be taxed at less then the rent income? I’d be happy to see an inflation adjustment to it, but this isn’t some productive investment in the way those arguing for low CGT are putting it.
We heard all about a ‘tax on jobs’ before the election. And that from the same people who are now saying that working should be taxed up to twice as heavily as speculating. Astonishing.
Regarding the inflation adjustment – my interest and dividend income is taxed before inflation adjustment, why would capital gains be different? It is not those people who have saved for their retirement and expected regular income who would suffer from an increase in CGT (even though the Daily Telegraph might give that impression). It is only those who have bought assets and speculated on a rise in value.
To be fair, when you tax capital gains the same as income, you should have one joint threshold of £10k, so that pensioners who live just off investment gain are not taxed punitively.
The answer to the poll question is clearly ‘yes’, since income and genuine capital gains are EARNED and should be taxed at 0% ,whilst economic rent is totally UNEARNED. We should be shifting to fully tax that instead.
Let’s start with the government-gifted privilege that allows banks to appropriate “interest” when they create debt-money deposits from absolutely nothing. It ain’t interest, it’s rent. And still we let them fleece us!
On principle I’d say yes, yes it should increase. But then you look at the statistics from other countries and the past, and it appears there’d be a high likelihood of actual revenues decreasing with a higher tax. I’m not sure that’d be prudent at this time.
No, but income from capital should. Why? Because it’s income. Income should be taxed at the same rate as income. That seems pretty obvious to me.
“But then you look at the statistics from other countries and the past” – Yes; this is a curious phenomena – it’s easier for rich people to move country than it is for poor people therefore they’ve arranged a system (through both lobbying and threats of migration causing loss of revenue) whereby they don’t pay as much tax on their income (called ‘capital gains’) as poor people do on their income (called ‘income’). Therefore we should invade Liechtenstein.
Hehe, poor people don’t pay 40% tax! But I see your meaning. Talk of closing up “tax loopholes”, as ol’ Nick was so fond of doing in the election campaign, really is just talk, it turns out.
Yes, as Andrew says, at zero per cent:
“If government there must be
Use revenue from rent, not from me”
Setting CGT or any other similar levy at a rate lower than Income Tax is asking for tax avoidance, just look at the situation in the United States where, as Warren Buffett observed, anyone with sufficient income ends up paying less tax than regular salaried employees.
Whether taxes on income that derives from wealth ought to be higher than those on earned income is a different matter. The principle should be that money must do work in order to be taxed at the same rate as regular income, that there should be some element of added value. That wealth should beget income just for existing is unjust and ought to attract a punitive level of taxation.
For example if I were to buy certain goods at a cheap price and merely wait for a change in the market price before selling then I ought to be taxed at a higher rate than someone who buys the same goods elsewhere then transports them to a different market. Similarly if I buy a painting and later sell it at a higher price because of a change in market circumstances I have not earned that income and should pay tax at a higher rate than if the change in value was because I had the painting cleaned and restored.
In the landlord example the income from rent is clearly earned income, landlords are required to do work on a property and they provide a service. When it comes to selling the property there should be two different elements involved, profit derived purely from changes in the housing market should attract a higher rate than any profit that is a result of alterations or conversions that make the property suitable for letting or other improvements.
“In the landlord example the income from rent is clearly earned income…”
Oh dear. Churchill and Lloyd George will be turning in their graves.
CGT is a very bad system for collecting “unearned wealth”. I find the lionising of investors as taking on noble, selfless risks while dismissing the sacrifices that labour makes quite distasteful. Where would those investments be if we couldn’t employ people to make them happen (or for that matter, employ the cleaners and all the other secondary services that allow businesses to do what they do)? And where is the risk in the capital gains accrued from a second home at all?
For me harmonisation is a no brainer. In the longer term we desperately need to look at how we might better collect economic rents, but we don’t have the luxury of living in the “long term”.
In principle yes. But the issue is that capital gains need to be inflation indexed. The difference in rates between Income Tax and CGT was supposed to compensate for this and cut out lots of tax avoidance schemes around taper reliefs, etc. by making the tax simpler and keep the tax take the same as it was before.
e.g. if you bought shares for £100 in 1970 and sold them for £2,000 in 2010 should you pay 23% tax on £1,900 or on the inflation adjusted amount?
If you paid tax on the cash gain £1,900 (@23%) it would be £437
However if you paid tax on the real gain it would only by £190
[see below
£100 in 1970 is worth £1,172 in 2010. So the real gain is £828.
23% of £828 is £190].
Unfortunately this poll does not distinguish between taxing capital gains at a higher rate or a lower rate than income.
I voted ‘No’ because I believe that, as a matter of general principal, capital gains should be taxed at a rate HIGHER than the persons marginal rate of income tax, with 2 exceptions:
1. Sole or main residence;
2. Gains resulting from the persons own efforts, e.g. building up a small business.
The tax system should reward effort. It should not reward ‘owning assets in the right place at the right time’.
Roger O’Brien, on 13th June 2010 at 2:07 pm wrote:
You mean, like, say, one’s home? In fact, the factors that go into an appreciating location value are *all* created by other people’s disadvantage. Where as at least in some productive investments it may very well be your capital that enables some productive activity to get off the ground in the first place.
Humour me perhaps, by having a read of the following quote from Winston Churchill on July 17th 1909 (when he was a Liberal fighting for Lloyd-George’s land taxes):
[from Project Gutenberg]
Now, why should capital be more highly taxed than land, let alone explicitly exempting land!
Jock, Robert said only MAIN residence, which I believe is already exempt from CGT (presumably because a home is something you need to have, and if you tax that, then you would never be able to move because the whole market having increased, you wouldn’t be able to find something else).
/now I find it weird that people say CGT should be adjusted for inflation.. most wages are not linked to inflation and neither is income tax. And if you consider saving accounts, they’re actually losing money right now (virtually all accounts have lower interest rates than the current inflation) yet are still taxed on top.
So if you want to link CGT to inflation then you should link income tax too.
Sounds like you are being softened up for the reversal of what was agreed in the Coalition Agreement. And btw that was not to equalise the tax rates on earned and unearned income – this will not happen even if income tax and CGT rates are equalised, as there is still the small matter of national insurance which in reality would still be an earned income surcharge.
With regards to property
Sorry, incomplete comment.
With regards to property I would hope that CGT takes into account the natural increase in value due to inflation. Someone shouldn’t be additionally taxed when selling a house if in real terms they’re only selling it for the same they bought it for.
Sandra, wages aren’t directly linked to inflation but normally the employer will raise wages over time at a rate which more or less tracks inflation.
Shares may go up or down in value as does property.
Perhaps we should be able to offset these losses against income tax.
I voted yes but agree that inflation increases should not be taxed.