Capital Gains Tax hike

One of the policies that is expected from the coalition is a massive hike in Capital Gains Tax.  It will go from 18 per cent to 40 per cent.

Allister Heath, Editor at City AM, puts this in context:

"It is also disappointing, though not surprising, that capital gains tax is going up, probably to 40 per cent. There will be exemptions for business assets and entrepreneurs. We don’t yet know the crucial details – how employees with stock options will be affected, whether entrepreneurs will be sufficiently protected and so on. An equally pressing question is what will happen to private equity funds: if their gains are not classified as business income, that industry’s long-term future in the UK would appear to be bleak, with disastrous consequences for jobs in London’s financial and business services industries as well as for the portfolio firms they provide capital to. Australia, New Zealand, Holland, Hong Kong and Switzerland are among the countries where the capital gains tax rate is already zero; and those countries have all shown that it is possible to do this while preventing regular income from being wrongly relabeled as capital gains to avoid tax."

So while Australia, New Zealand, Holland, Hong Kong and Switzerland have all cut the rate to zero we're going in the other direction.

Of course, they will tell us that various groups are protected from the changes, such an entrepreneurs.  That protection may not be enough and if they hit private equity firms then we will all suffer from the loss of the vigorous management and numerous corporate turnarounds that industry has delivered.  Even if they protect all the companies - and avoid ruinous economic harm from this measure, it will just hit responsible savers, exactly the people the Conservatives told us, going into this election, they were out to protect.

Also, one of the cardinal virtues of a good tax policy that George Osborne used to talk about was stability and resulting predictability.  Nasty surprises for investors reduce market confidence, disrupt business plans and generally cause unnecessary economic pain.  Capital gains tax has been up and down like a yo-yo in recent years; would a Chancellor of the Exchequer who believes in a stable tax system institute another dramatic (more than doubling) hike?

We do need serious action on the deficit, but the Financial Times reports that the tax hike will only raise £1.3 billion.  That's a lot of money but is pretty small beer in terms of our massive deficit.  Politicians need to cut spending and put these tax hikes on hold.

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