IEA warns against Coalition policy on Capital Gains Tax

Professor Philip Booth argues on Conservative Home that the Coalition policy on CGT is seriously damaging

Organising a coalition agreement is never easy. There has to be give and take on both sides. However, the Conservatives have made a big mistake in accepting some aspects of Lib Dem tax policy - especially in the area of Capital Gains Tax (CGT). The tax is seriously misconceived and raises little revenue, it can however, do much economic harm.

It is likely that there will be exemptions for so-called business assets and for business activities that the government regards as entrepreneurial. But these distinctions are arbitrary. If I had invested in Microsoft shares when it was a small fledgling company, why should that investment be treated differently from the investments of an owner-entrepreneur? Like Inheritance Tax, CGT will create an industry of avoidance techniques and spurious business capital structures that are simply designed to avoid the tax. Nice work for tax lawyers.

But the really pernicious aspect of CGT is that it is generally a double tax. We think of capital gains enriching somebody as if they arise like manna from heaven - and therefore are worthy of being taxed. But investments are valued for the income they produce. The values of investments fluctuate up and down, but investments only go up in value in a sustained way when investors expect them to be more profitable in the long term. Those profits, of course, will be taxed when they are earned.

The rest of this article can be read on the Conservative Home website.
 

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