UK Tax: Capital gains tax destroys growth, enterprise and jobs

Tax rises to pay for debt would be a mistake.

30 May 2010 -- Today is Tax Freedom Day, the day of the calendar year when we stop working to pay our taxes and start working for ourselves. Falling three days later than last year, it is a stark reminder of the increase in government involvement in the economy.

If borrowing, which is deferred taxation, were to be included, Tax Freedom Day would be in July. Government spending reductions – sufficient to allow medium-term tax cuts – must be the response, but tax rises would be a mistake. It is against this backdrop that we call for the Government to reconsider its position on increasing capital gains tax.

Many arguments against this move have been laid out in public over the last week or so, but we suggest that the increase is misguided for the following reasons: it discourages saving and ultimately investment; it leads to assets being sold at suboptimal times; it may cut the supply of affordable rented housing; and it penalises equity finance for companies yet further.

In addition, it may cause all this damage and yet raise no revenue, as some investors take expensive avoidance measures and others hold on to their assets in order to delay paying the tax.

Capital gains tax is, in short, a tax on growth, enterprise and jobs.

If capital gains tax is imposed close to an individual's marginal rate of income tax, it will be a massive slap in the face for millions of private investors who are trying to provide for their future retirement without claiming government handouts. This punitive act could haunt David Cameron as much Gordon Brown's attack on pension funds.

The Lib Dems' manifesto pledges on tax saw the party soundly beaten into third place at the general election. It is disappointing to see that so many of the Conservatives' ideas on allowing individuals to become financially self-sufficient, and therefore independent of the state, have been kicked into the long grass.

I had hoped that the politics of envy had departed with the last government.

Nowhere in the Conservative manifesto was there any suggestion of introducing swingeing tax increases.

Whether or not the Lib Dems want this unfair and confiscatory tax rise, David Cameron must know that his core supporters do not want it applied. He must know that they were looking to him to reduce the tax burden; to undo Gordon Brown's inexcusable raid on pension funds which has crippled so many employees, who looked forward to a decent retirement pension; and to carry through the Tories' long-held promise eventually to eliminate inheritance tax.

The Government is now, according to Vince Cable, committed to bringing more "fairness" to the tax system by increasing the rate of capital gains tax.

This will only lead to more people leaving the country and a reduction in tax revenues. It will also stall any economic recovery, as people will be less willing to invest in shares if the rewards are taxed at punitive levels – hindering the ability of companies to raise fresh capital.

The real losers will be poorer, hard-working families, who will face further economic misery and don't have the ability to relocate abroad or to hire tax accountants to best manage their finances.

How fair is that?

This tax rise is nothing less than an ill-considered attack on savings and thrift and I am sure that at heart both George Osborne and David Cameron accept this.

The solution is obvious – speculative gains arising within one year should be taxed as income, but other gains taxed as they are now.