Private equity taxation to rise?

The Financial Times reports that Alistair Darling is considering raising tax on private equity:

"Alistair Darling, the new UK chancellor of the exchequer, is considering an increase from 10 per cent to 20 per cent in the base rate of capital gains tax for investments classed as business assets – such as holdings in unlisted companies or shares owned by employees.

This could be accompanied by an extension from two to five years in the “taper relief” period – the time these investments must be held to reach the lower rate.

Mr Darling, who replaced Gordon Brown when he was appointed prime minister in July, is  also examining establishing a fiscal distinction between large buy-outs by “mega funds” and smaller venture capital deals or entrepreneurs selling their companies."

This may appeal to a populist desire to make the rich pay but increasing tax on private equity is, in economic terms, very dangerous.  These firms are the most mobile, the most able to move if they come under attack.

London has done really well out of attracting financial services firms both from the rest of Europe and from the United States, particularly following the onerous Sarbanes-Oxley regulations imposed there following the Enron scandal.  That competitive success has been a key driver of British economic growth.  If it were to be endangered we might all wind up worse off.

In an industry where firms are so mobile and face such low barriers to shifting capital where its treatment will be more favourable this analogy, from George Gilder's Wealth and Poverty, seems particularly apt:

"In an increasingly competitive global economy, a government can no more raise its revenues simply by raising its taxes than a company can raise its income simply by raising its prices.  Like a company, a government must constantly lower its prices and improve its services to expand its markets (its tax base)."

If the government wants to maintain its revenue it will need to keep our tax regime competitive.

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