Why raising capital gains tax is a lose, lose

By: Jonathan Eida, researcher

The UK is experiencing death by debt. As the Taxpayers’ Alliance new debt clock tool shows, debt is continuing to tick higher and higher without any reprieve. Currently, the debt clock shows the national debt at over £2.5 trillion, and is rapidly increasing at a rate of £382 million per day. But this doesn’t cover the whole picture. The real national debt, which includes public sector pension and state pension liabilities, stands at £12.1 trillion in 2024-25. Rather larger than the government would care to admit!

This problem needs addressing immediately.

The chancellor, Rachel Reeves, has made some steps in the right direction. Her announcement that she would cut winter fuel payments in a bid to solve the debt crisis was admirable. Despite being politically challenging, the decision to stop these payments was the correct one.

However, there is a more disturbing solution than saving money that she seems almost certain to reach for: tax rises. Tax rises are being viewed as the elixir to solve the debt crisis, the hope being that increases in tax receipts will help pay off the debt and move public finances into the black. It could come back to bite her. 

Thankfully, the chancellor has ruled out income tax, VAT and national insurance hikes. This will be a big relief to taxpayers who are already suffering under a tax burden which is forecasted to be the highest level in 80 years before 2030. 

Unfortunately that leaves plenty of other taxes on the table. One tax that Ms Reeves is suspiciously quiet about - capital gains tax. Proposals to equalise capital gains tax rates with income tax rates have been knocking around left-wing policy circles for some time. Only this week, the chancellor left the door open for a change of this kind. There are many reasons why capital gains tax would be a bad tax to increase.

For 2024-25, capital gains taxes are levied at 10/18 per cent and 20/24 per cent depending on taxable income and the type of asset being charged. 

According to the Treasury's very own statistics, a rise in cooperation tax would cost, I repeat, cost the government in tax receipts. A one per cent increase in the higher Capital Gains Tax rate would cost the government £10 million in receipts while a 10 per cent increase could cost £400 million. Needless to say, this increase would prove counterproductive in solving the debt crisis. 


Table 1: Direct effects of illustrative tax changes bulletin (June 2024), Capital gains Tax

This is little more than political pandering that will be levied in an attempt to pacify those who wish to punish wealth creators. It also flies in the face of Rachel Reeves’ pledge to lead the most “pro-growth” treasury in history. 

The economy turns on investment and wealth creation. It requires risk and incentive. Without this structure, transactions cease and investments stall. Capital gains are the purest result of investment transitions. To increase taxes on capital gains is to directly disincentivise investment. It will directly impact the UK’s economic standing, and not in a positive way.

At the tail end of 2023, the UK entered a recession.There has been a slight uptick since then but the economy is still crawling on its knees. Now more than ever the economy needs to be treated with care. A rise in capital gains tax will kick the economy while it is down. They should listen to the experts - raising capital gains tax won’t raise revenue.