Taxing inheritances.
I understand the Tories are about to discuss inheritance tax today
Many years ago I heard a suggestion, I can’t remember from whom, but probably the Liberal Party, which I found it very attractive.
The proposal was that inheritance tax should be charged not on the estate leaving the bequest but on the recipients receiving the bequests (note the plurals.) The recipients would be able to inherit modest amounts tax free, but pay tax on big bonanza inheritances, or a multitude of modest ones.
Thus, if we define a “modest amount” as, say, £50 000 (though that’s beyond the dreams of avarice of many people) then an estate of, say £1 000 000, not all that unusual nowadays, given the price of houses, would not be taxed at all if the bequests were in 20 different bundles of £50 000, but would pay the current rate (40%?) if the whole million went to one lucky recipient.
This would go some way to reducing inequality in our society, and probably increase the level of happiness. It would also probably encourage innovation, as potential entrepreneurs would have the wherewithal for start-ups.
Monetary bequests should simply be treated as income for the recipient and taxed as income at standard income tax rates.
ReplyDeleteBequests of property not be taxed at all when they are given but when they are sold they should be subject to capital gains tax on the full gain from when they were acquired to when they are sold, ignoring the transfer of ownership due to the inheritance.
So someone who bought a house for £50,000 which is now worth £1,000,000 could pass that house to their child who could live in the house and not have to pay any tax, but if they ever sold it they would pay capital gains tax on the whole increase from £50,000 to £1,000,000 (ie, no revaluing occurs when it is transferred by will).
Both these ideas are interesting addition possibilities. I'm especially interested in taxing the capital gains made through the increase in the value of houses. We really have to learn to see houses as machines for living in rather than as cash cows for the next, or next but one, generation.
DeletePeter
Deleteback to your original post about inheritance tax. Given the income and wealth inequality that exists in the UK the idea of sharing out an inheritance to more people has some attraction but I thought I'd look at the data
Currently less than 5% of all estates (c 32000) pay any such tax although this % will increase as tax free thresholds are frozen but property prices aren't.
This raised around £6.7 billion with an average (mean) tax of around £230,000 and a median of around £125,000.
Only about 700 estates were valued at over £5 million and these were taxed at around £2 billion i total
I've always thought this was an idea worth looking at seriously
ReplyDeleteAs you say it might encourage a wider sharing of wealth (although I doubt it would impact much on the low income families) and also stimulate consumption and then production
I'd also like to see it applied across the board - including the so-called royal family
Now there would be a policy I'd vote for
I've long thought that out whole tax system needs a rethink
ReplyDeleteIt's grown arm and legs over the decades with various govts just finding new things to tax for revenue purposes
Income tax is one place to start.
In England there are only 3 tax bands (4 if you count 0%) with a big change when you move from to a higher one - particularly from 0 to 20 and again from 20 to 40 with potential disincentives for people marginally increasing their income
The technology today means it is entirely feasible to have a much more graduated scheme where your personal tax code can be regularly updated by HMRC rather than the once a year that usually happens
Say 5% increments every few thousand £
eg £12570 0%
up to £15000 5%
up to £20000 10% etc
Automated payroll systems would have no problem with, say, monthly or quarterly adjustments
I've long thought that out whole tax system needs a rethink
DeleteYou and everyone else.
It's grown arm and legs over the decades with various govts just finding new things to tax for revenue purposes
Indeed. We should make the tax system simpler.
The technology today means it is entirely feasible to have a much more graduated scheme where your personal tax code can be regularly updated by HMRC rather than the once a year that usually happens
Wait -- you want to introduce even more tax bands than there currently are? I thought you wanted to make things simpler -- doesn't this makes them even more complicated? And for what benefit?
its more graduated so moving to the next higher one is less of a financial shock and less of a disincentive
DeleteIf I'm on a 0% band and get a pay rise/promotion of £1000 I lose £200 of that in tax which can be a big disincentive
If I'm on a 20% band the same pay rise I lose £400
its more graduated so moving to the next higher one is less of a financial shock and less of a disincentive
DeleteBut there are more bands so moving to the next higher one (and therefore hitting the higher marginal tax rate) happens more frequently.
So the 'shock' might be less but many more people will hit it and much more often. With wide bands, you might cross a threshold once every five or ten years; with narrow bands as proposed you'd be hitting a threshold every year or two.
I don't see why that's better?
For me it's more t do with the psychology and perception
DeleteI'm aware that in terms of economic efficiency 2 bands are often seen to be optimal
However, in terms of individual worker perception, to go from 0% to 20% or 20% to 40% is perceived as a big - and disproportionate - jump
That leads to the question: is it worth me putting in the extra work/hassle/time to get the pay rise when I'm going to lose so much of it.
I'd argue that some people would say "no" leading to an overall "loss" to the economy as a whole
That leads to the question: is it worth me putting in the extra work/hassle/time to get the pay rise when I'm going to lose so much of it.
DeleteI'd argue that some people would say "no" leading to an overall "loss" to the economy as a whole
Yes, I get that. But surely some people will also ask 'is it worth me putting in the extra effort if I'm going to go from 10% to 15%?'
And some of those will answer, 'no'.
Now, intuitively it seems obvious that fewer will say 'no' to a jump from 10% to 15% than will say 'no' to a jump from 20% to 40%.
But there are many more of those jump in the new system.
So: a bigger jump affects fewer people, but more of the people it does affect will say 'no'.
On the other hand, fewer of the people affected by a smaller jump will say 'no' -- but there will be many more people affected by the smaller jumps.
Which leads me to ask: how can you be certain that the two effects -- smaller jumps leading to fewer people at each jump point saying 'no', but more jump points meaning more people are faced with the question -- won't basically cancel each other out, and leave you back basically where you were before?
Because if they do cancel out, then you have just incurred the expense of complicating the system for zero gain, which is a loss.
Even if they don't cancel out, you would have to be sure that the gain you get from fewer people saying 'no' would more than cancel out the loss from the costs of making the system more complicated, in order for the policy as a whole to show a gain.
So again: how can you be sure that the 'fewer people saying "no" at each jump point' effect will be sufficiently greater than the 'more people facing jump points' effect to make the policy change worth it?
I agree that the whole tax system needs a rethink. As I understand it, it has, like Topsy, "just growed" as successive chancellors have tweaked and amended it in the light of their need for money and the squeals of the geese they decided to pluck. it is now between 17 000 and 23 000 pages long.
DeleteI believe the "rewrite" should be an all-party affair advised by umpteen Citizens' Assemblies, each one studying a different aspect, so that "the public" fully understood what was needed and the pros and cons of each proposal. I'd like to see tax directed to "bads" rather than "goods" and especially "rent" in the economic sense of "a return to a factor over and above its supply price." In this sense stand up "land" which has no supply price, and can't be shifted to a tax haven.
I believe the "rewrite" should be an all-party affair
DeleteHow can that possibly work when Labour and the Conservatives start from completely different premises about such basic things as the reason for tax existing? I don’t see how they could ever come to an agreement about how the tax system should be designed, because you can’t design something until you decide its purpose and they disagree on its purpose so they will disagree fundamentally on the design?
In this sense stand up "land"
I agree taxing land is superficially attractive because it has low deadweight cost, but isn’t there a massive problem in that it’s impossible to know the value of a piece of land unless it has been sold recently on the open market? How do you solve that? Even guessing based on nearby sales doesn’t work because two pieces of land right next to each other can differ wildly in value.
I'd like to see tax directed to "bads" rather than "goods"
Also you seem to be very confused about the purpose of tax.
There’s basically two functions of tax: either you tax to raise revenue, or you tax to change behaviour.
Taxes on employment are an example of the former; taxes on cigarettes an example of the latter.
The thing is that the same tax can’t do both. Because if a tax is successful in changing behaviour (eg, people stop smoking to avoid the cigarette tax) then it doesn’t raise any revenue. But if a tax raises significant revenue, then it can only have changed behaviour at the margins.
Saying ‘bads’ should be taxed implies you want to use tax to change behaviour (so there are less of the bads). But if you are successful in that then there will be no revenue raised to pay for all the welfare spending you want.
https://www.ippr.org/articles/the-government-should-scrap-tax-bands-to-revolutionise-income-taxes-in-the-uk
DeleteThanks. Interesting and persuasive. Well spotted.
Deletehttps://www.ippr.org/articles/the-government-should-scrap-tax-bands-to-revolutionise-income-taxes-in-the-uk
DeleteThat's an interesting idea and it has some initial attractions. But as always the first thing you should do with an idea that seems initially attractive is try to work out what bad unintended effects it might have. And in this case I would worry that by making the system less transparent -- because you have to work out a formula, rather than simply being able to see a list of rates and bands -- it would give future Chancellors greater opportunities to raise stealth taxes.
The main way Chancellors gain extra money without making it clear to the electorate that that is what they are doing and giving the electorate a chance to object is through fiscal drag: not changing the bands as inflation increases people's wages, meaning that more and more people are caught in higher and higher tax bands. The top rate, kicking in at £100,000, for example, was meant to be for the very rich but now catches many people who aren't in fact that well off -- it should have been raised to about £150,000 by now.
By making the tax people pay less easy to understand by making it a formula rather than a simple figure for a band, I worry that that would make it both more tempting to future Chancellors to get extra money by fiscal drag by not updating the formula in line with inflation, and less easy for taxpayers to realise that is what is happening -- because who wants to try to work out the impact of a change in a complicated formula, compared to a simple band threshold change? So if the Chancellor says 'and we will be leaving the income tax formula the same' people might well say 'phew I don't have to recalculate my tax, good' instead of what they should be saying, 'hang on, that is effectively a stealth tax increase! I object!'.
I agree that transparency is important but I'd also argue that much of the current tax system in the UK isn't
DeleteTake PAYE. I doubt that everyone actually understands their tax code or can figure out if it's correct or not. Capital gains? You need an accountant.
And while some sort of land tax is favoured by many economists the complexities of calculation would leave most baffled.
I agree that transparency is important but I'd also argue that much of the current tax system in the UK isn't
DeleteOh yes, absolutely. But that doesn't mean that any particular change to it is good. That's the politician's syllogism:
1. We must do something
2. This is something
3. Therefore, we must do this
Pointless comment. So what's your proposal
DeleteSo what's your proposal
DeleteFor simplifying the tax system? Well, I’d start by combining all income tax and national insurance (both kinds) into one single tax, and dealing with the cliff-edge marginal tax rates.
that's the easy bit
DeleteOne of the difficulties is deciding on the mix of tax take from the traditional land, labour, capital split
I've not looked to the data recently but I suspect the contribution that labour makes to GDP is slowly reducing and that from capital increasing over time with implications for tax take
Land is hardly taxed at all directly hence the interest from some in some sort of land value tax
My own preference would be to focus taxes primarily on income and wealth (including land) and get rid of much of the rest
Insurance premium tax is one example
that's the easy bit
DeleteIf it were easy it would have been done by now! I think we should do the so-called ‘easy’ bit before we waste time even thinking about the hard bits!
the other easy bit is equalizing income tax and CGT
Deletethe other easy bit is equalizing income tax and CGT
DeleteNo, that’s a terrible idea. Investing in capital always involves risk: the value of investments, as we are always being told, can go down as well as up. Therefore in order to encourage people to invest, the rewards when an investment does pay off must be greater than those gained by just playing it safe and earning a steady income. That’s why it is right that tax rates on capital gains are lower than those on income: to compensate for the greater risks of capital investment compared to salaried employment.
False logic
DeleteFirst, not everything classed as an "investment" and subject to CGT is really an investment in the economics sense.
I have money put into stocks & shares funds that are classed as an "investment" with any profit subject to CGT but what I'm really doing is saving part of my income.
I could choose to put that money into a genuine savings account via a high street bank. This would attract interest on which I'd be taxed at my PAYE rate (20% or 40%)
Or I could do what I've done which is to put the money in an "investment" which if I make a profit I'm taxed at 18% or 24%
Clearly the risk is potentially higher with stocks & shares (although if I choose these carefully and wisely the risk is effectively zero) so i do expect a higher reward (through dividends and/or increase in share price)
That much is basic economics
But that's NOT a justification for the differing tax treatments of the same money
Equalise the tax treatments and the market (yes the market) will make the necessary adjustments to compensate for this at equilibrium in both the savings market and the "investment" market
Equalise the tax treatments and the market (yes the market) will make the necessary adjustments to compensate for this at equilibrium in both the savings market and the "investment" market
DeleteYes exactly. The market will make the necessary adjustments — which will result in more money going to safer investments like cash savings or tracker funds, and less to risky ventures like new companies and startups with unproven, innovative products.
It will result in more people taking salaried jobs instead of starting their own companies, because the potential rewards they get for creating a company that they can sell for a profit now don’t outweigh the risks that they might lose everything.
These are bad results . We need people to take risks in order to get new, innovative products and to start businesses that serve customers.
Therefore to the extent that the government intervenes in the market, it should do so to encourage risk-taking.
Taxing capital gains less than income is one way to encourage risk-taking; equalising the two would discourage risk-taking.
Therefore we should not equalise.
(Your tracker fund does reduce the risk, not quite to zero of course but nearish to it — at the cost of the potential returns being much lower than for a more risky investment, which means that for you the difference between a 24% and a 40% tax rate is unlikely to be significant. It’s only significant for investments where the potential returns are large — exactly the kind of risky investments we want to encourage)
Totally naive
DeleteWe have multiple posts from Anons commenting that govt's should just let the free markets work
And here you are saying no the govt should subsidise the risk that so-called investors are making
Utter nonsense
Profit made from "investing" should simply be seen as income in the same way that someone's salary is and taxed in exactly the same way
The market will adjust for this - or are you saying the market won't make the adjustment and doesn't work?
And here you are saying no the govt should subsidise the risk that so-called investors are making
DeleteNot taxing something is not a subsidy! In the natural state of the market, nothing would be taxed; so whenever a government imposes a tax, it impairs the ability of the market to function freely and efficiently.
Markets of course will adapt to taxes — that is what markets do. But there’s no guarantee that the market solution adapted for the tax will be as advantageous for society as the market solution without the tax would have been.
In the case of taxing capital gains, imposing high taxes in them makes risk-taking less rewarding, so the market will adapt by allocating more resources to safer places than to riskier places.
This is less bad for society, because it is from risky uses of resources that good things like innovative products come from.
The point of taxes is to raise sufficient revenue for a government to do the things it needs to do (because only a government can do them), without being too disadvantageous to society. High taxes on capital gains, that make it even more risky relative to salaried employment and other safe investments than it already is, violate this.
Taxes of course should never be used to try to shape society, eg to redistribute wealth — the purpose of taxes is only to raise revenue for the necessary functions of government.
"Taxes of course should never be used to try to shape society, eg to redistribute wealth — the purpose of taxes is only to raise revenue for the necessary functions of government."
DeleteSays who?
Redistribution is an acceptable policy goal if it's judged to be warranted
Says who?
DeleteSays me, and my vote counts as much as yours.
Redistribution is an acceptable policy goal if it's judged to be warranted
No it isn’t. Because if you believe in redistribution you are basically saying that you think everything ultimately belongs, not to the people who own it, but to the government, and therefore the government is entitled to take from one and give to another according to how the government thinks things ought to be apportioned.
That is an evil point of view.
You seem very confused over "investment"
DeleteIn economics - which is what we're talking about - investment is a tightly defined term
Investment is defined as the the addition to the capital stock of the economy
Tesco building another store is investment
Amazon building a new data centre is an investment
Rolls Royce buying new machinery if an investment
My putting money into stocks and shares is NOT an investment in economics even though the term may be used by laymen. No new capital is created, and the economy's productive capacity doesn't change.
Economics classifies my share purchase as a financial transaction hence as saving just as my putting the money into a high street savings account
So if both are the same - they're both savings why tax them differently
QED eh?
So if both are the same - they're both savings why tax them differently
DeleteSo you’re saying we solid distinguish between seed capital — someone buying shares at an IPO or other share issue, or providing venture capital or putting their own money into a business — and tax gains on that capital at an extra low rate, while taxing gains on market-traded shares at a higher rate (say equal to income rate)?
Actually I wouldn’t have too much of a problem with that in principle, as long as the practical administrative problems can be overcome.
So can we agree on that plan?
As I said, in economics financial "investment" isn't seen as investment per se but as saving so it makes sense to treat it in exactly the same way - no special tax breaks, equal tax rates, threshholds etc
Delete"Real" investment - ie genuine and productive additions to the capital stock - such as provision of seed capital, venture capital, IPOs etc - is seen as "beneficial" to the economy as a whole and therefore should be seen separately for any tax (or subsidy) purposes. In practice such tax regimes become ever more complex as govts change policy aims and treated such investment differently across different industries.
"Real" investment - ie genuine and productive additions to the capital stock - such as provision of seed capital, venture capital, IPOs etc - is seen as "beneficial" to the economy as a whole and therefore should be seen separately for any tax (or subsidy) purposes.
DeleteIs that a ‘yes’, you agree with the above?
Yes. As I said, I see a big difference between real investment (in capital stock) and financial "investment" (eg share purchase) which simply transfers ownership of some asset
DeleteIf memory serves, cgt and income tax were more or less equalised under the Tories under Lawson but then - for some reason - pulled apart by Gordon brown
Odd politics with regard to the "capitalists" involved
Yes
DeleteGreat.
But — oh dear. I’ve been thinking about it some more and I think I see a flaw. Let me know if you think I’ve made any logical errors.
Investors put their money in capital because they want to see a return. They want to grow an asset that they can then sell at a profit. So the idea is that when they sell their share in that asset, after investing in the capital, they are taxed at the lower ‘investment rate’ (the current capital gains rate). But then the person who buys that share from them, when they sell it on to another buyer, they are charged tax at the higher ‘income rate’ (equal to the income tax rate).
Here’s the problem though. If I buy an asset which I know when I sell it on will be taxed at 40% instead of 24%, that makes that asset worth less to me, doesn’t it? I mean that just seems logical. So I will be willing to pay less for that asset than I would have been if it had been taxed at the lower rate. That’s just rational, right? If I buy a share for £10 thinking it will increase in value to £20 and be taxed at 25%, then I am looking at a profit of £7.50. But if that same gain will be taxed at 40% then I will only make a profit of £6. At 40% tax, to make the £7.50 profit on the £20 price that I predict I can sell at, I want I must buy at £7.50 instead of £10.
That means that the initial investor knows that when they come to sell on their share in the initial capital investment, the buyers will be not be willing to pay as much - they will only offer £7.50 where before they would have offered £10.
So this has a knock-on effect on the return that the initial capital investor can expect, doesn’t it? And that then makes them less likely to invest, especially at the margins on the most risky investments.
So in fact, distinguishing between ‘real investment’ and ‘financial investment’ in the tax system by taxing the latter higher than the former would actually have the consequence of discouraging real investment, wouldn’t it? Because the whole point of making a real investment is to produce an asset that you can then make a profit on by selling into the market to turn it into a financial investment. So if you make financial investments less valuable, by taxing them more highly, you inevitably as a knock-on effect make real investment less profitable as well, don’t you?
Have I got anything wrong?
Yes
DeleteYes
DeleteWhat, exactly?
The issue is one of timing and how the market reacts to this
DeleteYou've bought shares under the current tax regime (CGT 24%) and factored that into your decision as to whether to buy or not. That decision is now in the past
Burnham has now announced that CGT on share purchases will equate to income tax at 40%
You want to sell your shares to me now.
I know that in the future I'll have to pay 40% CGT so I'm factoring that into the price I'm willing to pay you for the shares. Logically, that price will be less than it might otherwise have been had CGT not changed.
Exactly how much will depend on supply and demand in the market
So those shares are likely to see a fall in price.
However when I come to sell those shares at some stage in the future I've already factored
CGT at 40% so there'll be no equivalent further fall in share price.
In other words the share price will take a one-off hit just as they do with Trump's attack on Iran, a new Covid outbreak, Scottish independence ....
That's the risk you take when you buy shares on the stock market
simplest way to look at it is probably through the old supply/demand chart
DeleteThe current share price is at equilibrium - the intersection of the supply curve (sellers) and demand curve (buyers)
A change in the tax regime (increasing CGT) will most likely shift the demand curve downwards as buyers factor in the new and higher CGT and will be willing to pay less for the shares as a result.
At some point a new equilibrium share price will be reached and will remain the equilibrium until some other factor "shocks" the market
At some point a new equilibrium share price will be reached and will remain the equilibrium until some other factor "shocks" the market
DeleteRight, but don’t you see that’s exactly the problem?
The new equilibrium price will be lower than the old one.
That means that when I, as a rich person, am deciding whether to make a risky investment in a new company that has an innovative new product idea, and I am weighing up the risks against the potential rewards, those rewards are smaller because of the new equilibrium than they would have been under the current system.
So I am less likely to make the investment.
And this is bad, because we as a society benefit from people making risky investments because that is where new products that make us as a society better off come from.
Do you understand? As a society we want to encourage people to make risky investments. You proposed change would, by your own admission, disincentivise that, by lowering the equilibrium price of the stock market which the people making those investments rely upon to realise their gains.
This would be bad, which is why we shouldn’t do it.
You're mixing up several connected but different issues here
Delete1. One of the aspects of a “fair” tax is that it's equitable – people in broadly similar circumstances pay the same amount of tax.
At present in the Uk we have one system for taxing incomes and savings and another for “investment”
As I've posted, in economics investment is classed as addition to the capital stock and NOT simply trading in shares on the stock market (which I equate simply to a form of gambling – often with someone elses's money)
So If I'm an employee and get paid say £100k pa I pay the appropriate rate of income tax.
If I buy and sell shares on the stock market and make a £100k profit I'm taxed differently
As an employee I'd pay Tax c £27000.
As a trader I'd pay CGT of c £23000
Personally I can see no real justification for this (save me the BS that such “investment” carries a risk and the lower rate of CGT compensates for this. If the markets are working then any risk in buying a share is already factored in to the share price) as both are effectively earned income.
If memory serves, the US distinguishes between share buying/selling where shares are held for less than 12 months or over 12 months. With the former a higher CGT is levied equal to the relevant income tax. If that works for the US – the bastion of free market capitalism – it should work for the UK
2. You argue that “real” investor would be deterred from risky investments because of the impact on traded share prices. I appreciate the argument but remain unconvinced of the reality.
This would only affect those companies who had reached a stage where they wished to issue public shares to realise a financial gain - IPOs. However, there are only a handful – c 20 – of these each year in the UK. It's worth noting that of the c. 5.5 million registered companies in the UK less than 2000 are publicly listed with shares to trade.
Successful startups that want to cash in their gains have alternative– often more attractive - routes such as mergers or takeovers where the share price issue is irrelevant
3. You link decisions taken on risky investments (real investments only) to share price
Again I remain unconvinced that this as a major factor in practice
A company considering expanding it's capital investment will look at NPV, IRR, payback, strategic fit, resource capability …. I've not come across any research suggesting one of the main Yes/No factors is – what will this do to the share price.
If you have any evidence to the contrary I'd be interested in seeing it
4. You're correct in saying that we want to encourage entrepreneurial and (sensible) risk taking to boost the economy. As you know the UK has a poor track record on this. However again the research does not link this to share price. The research is well known: economic and political uncertainty; short-termism by both industry and government; lack of investment in public sector infrastructure; ...
None of this relates to share price.
One of the aspects of a “fair” tax is that it's equitable – people in broadly similar circumstances pay the same amount of tax.
DeleteI don't care whether a tax is 'fair' and neither should you. How can you even judge whether something is 'fair'? It's so subjective. One person's 'fair' is another's 'unfair'. There are no objective ways to judge 'fairness'.
The purpose of taxes is to raise revenue for necessary government expenditure, so there are only two factors to consider: 1. will it raise revenue? and 2. will it have bad economic effects? If it won't raise revenue, then there's no point in it. If it will raise revenue but have bad economic effect, then you have to decide whether the bad economic effects are worth the revenue raised.
And that's all that matters. No meaningless subjective guff about 'fair'.
This would only affect those companies who had reached a stage where they wished to issue public shares to realise a financial gain - IPOs.
No it wouldn't. In fact it would affect them least. It would affect most companies that are trying to attract venture capital or angel investors, because those are the ones who are looking at the potential return when they sell their stake.
A company considering expanding it's capital investment will look at NPV, IRR, payback, strategic fit, resource capability …. I've not come across any research suggesting one of the main Yes/No factors is – what will this do to the share price.
No, the company isn't looking at what this will do to the share price. But in order to expand the company has to find someone willing to either lend it the money, or to give it the money in return for equity. The people or institutions considering
providing capital by the latter route do very much care what happens to the share price because that is the asset that they will get in return for their money.
The research is well known
Yes, I know -- it's mostly a problem of over-regulation. But just because there's already one disincentive to invest in British companies is no reason to add another one!
I used the term "equitable"
DeleteThis is generally accepted in economics as one of the principles of an effective tax system,. If it;s not perceived as equitable/fair then it won't get electoral support
The late lamented poll tax is a classic example which was an important factor in Thatcher's demise
No it wouldn't. In fact it would affect them least. It would affect most companies that are trying to attract venture capital or angel investors, because those are the ones who are looking at the potential return when they sell their stake.
DeletePlease read more carefully
The issue is CGT as it relates to share buying/selling on a speculative basis
As such venture capitalists etc aren't affected by the change
"The people or institutions considering
Deleteproviding capital by the latter route do very much care what happens to the share price because that is the asset that they will get in return for their money."
Please read more carefully
See my comment above
"it's mostly a problem of over-regulation."
DeleteNo it isn't
read any of the research publications on this
"But just because there's already one disincentive to invest in British companies is no reason to add another one!"
DeleteOh dear you really don't understand do you?
The change in CGT I'm discussing - as I set out previously in detail - won't affect investors who are directly supporting real capital investment
My buying shares in Tesco isn't capital investment per se
Interestingly I note there's no response to the fact that the good old USofA has aligned its version of CGT with income tax
DeleteWhat's sauce for the goose ...
I used the term "equitable"
DeleteWhich is just as subjective and meaningless as 'fair'. Taxes shouldn't be designed to be 'equitable', they should be designed to raise the needed revenue with as few bad economic effects as possible. That way the economy continues to grow as fast as possible and people get richer, which is good for everyone.
The change in CGT I'm discussing - as I set out previously in detail - won't affect investors who are directly supporting real capital investment
But it will -- not directly, but indirectly, as a second-order effect. It won't reduce what they get directly, but by reducing the equilibrium price of the stock market into which the real capital investors will be selling their stakes (a direct effect that you admint above it will have) to realise their gains
Read what I wrote. Venture capitalists are affected because venture capitalists rely for their returns on selling their stakes into the market where people are buying and selling equities on a speculative basis. A tax change which directly reduces the equilibrium level of the speculative market therefore affects the amount that venture capitalists can expect to get when they sell their stakes into the market, and therefore indirectly affects how much venture capitalists are wiling to invest.
You have to consider indirect, second and third and fourth order affects of tax changes, not just the direct first-order effects.
And the indirect effect of this change would to be reduce the incentive to provide venture capital.
The change in CGT I'm discussing - as I set out previously in detail - won't affect investors who are directly supporting real capital investment
But it will -- not directly, but indirectly, as a second-order effect. It won't reduce what they get directly, but by reducing the equilibrium price of the stock market into which the real capital investors will be selling their stakes (a direct effect that you admit above it will have) to realise their gains it will reduce the price they can expect to get for those stakes when they sell them, which definitely does affect their decision as to whether providing capital investment will give the best return / risk ratio that they can get for their money.
Interestingly I note there's no response to the fact that the good old USofA has aligned its version of CGT with income tax
Whoever said that everything that America does is good economics? Tariffs, anyone?
Tariffs HAVE worked for Trump
DeleteLook how other countries have responded - he's got what he wanted. Whether it's good economics is another matter.
I note again there's no direct response to my point that the US has a 2 tier CGT system that clearly doesn't deter capital investment
And none of your points relate to the fundamental causes of low capital investment in the UK
Delete"Taxes shouldn't be designed to be 'equitable'"
DeleteOh dear, someone else who hasn't done their economics homework
try reading Adam Smith - you know, the guy who's the hero of the free market believers.
He sets out what he calls the four canons of taxation, the first of which (go on have a guess) is the canon of EQUITY
Look how other countries have responded - he's got what he wanted. Whether it's good economics is another matter.
DeleteWell, of course things can be good politics but bad economics. But I hope you would agree that when it comes to taxes we should be looking to make good economic decisions, not things which might be politically popular.
He sets out what he calls the four canons of taxation, the first of which (go on have a guess) is the canon of EQUITY
I think you need to read Smith more carefully. The principle of 'equity' is that 'The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.'
In other words, that those who get most revenue should contribute most. It's about proportional taxation, not some vague notion of 'fairness'.
Anyway I note you have no actual reason as to why my analysis of why the proposed change would have the indirect effect of reducing incentive to invest in risky businesses, so I will consider that proved.
Oh dear again
DeleteSo proportional taxation isn't fair?
equitable
adjective
Showing or characterized by equity; just and fair. synonym: fair
I repeat my point:
So If I'm an employee and get paid say £100k pa I pay the appropriate rate of income tax.
If I buy and sell shares on the stock market and make a £100k profit I'm taxed differently
As an employee I'd pay Tax c £27000.
As a trader I'd pay CGT of c £23000
Is that equitable? Or even fair?
As usual you've not bothered reading my earlier replies (or haven't understood them)
I'll repeat
You argue that “real” investor would be deterred from risky investments because of the impact on traded share prices. I appreciate the argument but remain unconvinced of the reality.
This would only affect those companies who had reached a stage where they wished to issue public shares to realise a financial gain - IPOs. However, there are only a handful – c 20 – of these each year in the UK. It's worth noting that of the c. 5.5 million registered companies in the UK less than 2000 are publicly listed with shares to trade.
Successful startups that want to cash in their gains have alternative– often more attractive - routes such as mergers or takeovers where the share price issue is irrelevant
So for the vast majority of start up and successful businesses never come anywhere near issuing public shares and therefore will not be deterred by your "indirect" effect
If you have evidence let's see it
And as for the big boys, I've already said their capital investments are taken using defined criteria and future share price isn't one of them
Again let's see your evidence
"Interestingly I note there's no response to the fact that the good old USofA has aligned its version of CGT with income tax"
DeleteSo let's get your views as to why the UK shouldn't adopt a similar approach
a) speculative share dealing taxed at the same rate as income tax for shares held for more than a year
b) speculative share dealing taxed at a CGT rate below income tax for shares held for less than a year
c) real capital investment treated more favourably than b) for CGT
So let's get your views as to why the UK shouldn't adopt a similar approach
DeleteOh that’s easy — because we’re competing with America for investment. So if they adopt an investment-unfriendly policy we should say thank you, do the opposite, and reap the benefits.
Of course the problem is at the moment America has lots of pro-investing policies and one anti-investing policy and we have the reverse. But that’s not a reason to give up the one thing we have — it’s a reason to move the rest of our policies towards the pro-investment side.
So proportional taxation isn't fair?
DeleteThere is no objective definition of ‘fair’ so that’s a meaningless question, economically. It’s a political question.
Is that equitable? Or even fair?
Who cares? I don’t. The only question I care about with tax is, does it provide sufficient revenue for the government to do its essential functions while promoting economic growth and respecting private property as much as possible?
Successful startups that want to cash in their gains have alternative– often more attractive - routes such as mergers or takeovers where the share price issue is irrelevant
But your proposed tax change doesn’t distinguish between publicly traded and privately traded shares. A company merger or takeover is still about selling shares — just it’s a private transaction. Your tax change would then still apply when the merging or taking-over company wanted to sell the acquisition on, and therefore would still depress the initial price they would be willing to pay.
Fundamentally, if you tax something then you get less of it. You agree that’s an iron rule, right? So if you tax capital gains you get less capital gains. That’s bad. So we shouldn’t.
1. "Tax fairness is a concept which stipulates that a government's tax system should be equitable to all citizens. "
DeleteRemember Adam Smith?
2. "your proposed tax change doesn’t distinguish between publicly traded and privately traded shares"
Please read more carefully before posting.
I stated a capital gains tax equal to income tax on publicly traded shares
BTW you still haven't responded to my repeated question about the USA doing exactly this
3. Fundamentally, if you tax something then you get less of it. You agree that’s an iron rule, right?
This is gibberish
Are you actually trying to say that increasing a tax leads to less tax revenue?
If so where's your evidence.
Economic theory shows that - under various assumptions and complex maths - there may be an optimal tax rate for a specific tax.
Interestingly the theory distinguished between optimal in a revenue collecting sense and optimal in terms of wider econmic impact
Ch 9 of one of my books on mathematical economics explains this but so do lots of others
Remember Adam Smith?
DeleteYes — Adam Smith’s principle was that tax should be proportional to ability to pay, ie, it shouldn’t be a poll tax where everyone pays the same. That says nothing about tax bands. A flat tax rate of 30% on all income would satisfy that; so would a progressive tax system. The current capital gains tax system satisfies Smith’s principle.
I stated a capital gains tax equal to income tax on publicly traded shares BTW you still haven't responded to my repeated question about the USA doing exactly this
I have responded to that many times. My response is that it’s a bad idea, that the United States doing it doesn’t make it a good idea, and that we shouldn’t do bad things just to follow the example of America.
Are you actually trying to say that increasing a tax leads to less tax revenue?
No. I’m trying to say that if you tax smoking, less people will smoke. If you tax petrol, people will drive less. If you tax house sales, people will move less. If you tax jobs, people will employ other people less. If you tax financial transactions, people will make fewer financial transactions. If you tax windows, people brick up their windows. If you tax beards, people will shave more.
This is just obvious, and indeed is often deliberate (the whole point of taxing cigarettes is to get people to smoke less; the point of taxing pollution is to get people to pollute less).
I stated a capital gains tax equal to income tax on publicly traded shares BTW you still haven't responded to my repeated question about the USA doing exactly this
DeleteI have responded to that many times. My response is that it’s a bad idea, that the United States doing it doesn’t make it a good idea, and that we shouldn’t do bad things just to follow the example of America.
So why isn't it a good idea?
The US obviously think it is
"Tax fairness is a concept which stipulates that a government's tax system should be equitable to all citizens. "
Deletewho's saying anything about poll tax?
You need to look up the word in the dictionary
"Is that equitable? Or even fair?
DeleteWho cares? I don’t. "
So your on your own in this view against the whole of the economics profession - including Adam
"This is just obvious, and indeed is often deliberate (the whole point of taxing cigarettes is to get people to smoke less; the point of taxing pollution is to get people to pollute less)."
DeleteI'm talking about equating capital gains tax with income tax for publicly traded shares as both are classed as income
Where's your evidence that this will cause a reduction in capital gains tax revenue?
I stated a capital gains tax equal to income tax on publicly traded shares
DeleteYou didn't: the phrase 'publicly traded' appears nowhere in https://keynesianliberal.blogspot.com/2026/10/spread-it-around.html?showComment=1792055935023#c6088421183279993581
So why isn't it a good idea?
DeleteBecause it would suppress the incentive to invest in innovative companies.
The US obviously think it is
America is not always right about everything. They are wrong about this.
who's saying anything about poll tax?
Adam Smith is, if you read what he actually wrote.
Where's your evidence that this will cause a reduction in capital gains tax revenue?
I never said it would lead to a reduction in capital gains tax revenue. I said it would result in a reduction in capital gains. And it would.
Extracts
Delete"while taxing gains on market-traded shares at a higher rate (say equal to income rate)
I buy and sell shares on the stock market and make a £100k profit I'm taxed differently
CGT as it relates to share buying/selling on a speculative basis
The change in CGT I'm discussing - as I set out previously in detail - won't affect investors who are directly supporting real capital investment
Please read more carefully before posting.
I stated a capital gains tax equal to income tax on publicly traded shares"
Given you seem to have difficulty in reading and comprehension, let me make it clear
Equate CGT to income tax for capital gains realised from dealing in publicly trade shares
Put a time frame on (as in the US) if you like
For or against - any evidence as to why it wont work not just your opinion
"Fundamentally, if you tax something then you get less of it. You agree that’s an iron rule, right? So if you tax capital gains you get less capital gains. "
DeleteAgain this is gibberish
The tax doesn't affect the QUANTITY of capital gains realised - that's determined by the buying/selling price on the market
The tax does affect how much of the capital gains realised you get to keep
Adam Smith
Delete“The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.”
Key word is "proportion" - not a flat rate as is a poll tax
Thatcher forgot this and lost her job as a result
The tax doesn't affect the QUANTITY of capital gains realised - that's determined by the buying/selling price on the market
DeleteYes. Exactly. And the price on the market is affected by the tax. You yourself said above: changing the tax will mean the market finds a new equilibrium price. That new price affects the gains made.
So the tax will change the gains made, by changing the equilibrium price of the market.
Say today I buy at price B and sell at price S. My gains are thus S - P. Simple.
DeleteThen the tax comes in. The prices all change to reflect th enew equilibrium; after a transition period things have settled, and for the same trade I now buy at B' and sell at S' for a bain of S' - B'.
Say the effect of the tax is such that the new equilibrium prices are all 10% lower than the old ones.
So B' = .9B and S' = .9S
So the new gain is (S' - B') = (.9S - .9B) = .9(S-B).
So the effect of the tax has been to reduce all gains by the same proportion as it reduce the equilibrium price.
And on top of that I have to pay a higher rate of tax on my now-smaller gains. So that's a double hit.
How can this not discourage people from investing?
Well , let's look at the real world shall we?
DeleteAround 60% of the FTSE100 is owned by overseas investors - who don't pay CGT in the UK
of the remaining 40%, 3/4 is in ISA wrappers or pension funds - and guess what they don't pay CGT either!
As Hamish McCrae commented "any change in UK CGT won't affect the market"
And your basic analysis earlier is static rather than dynamic.
But if only 10% of owners of British shares pay capital gains tax — something I find highly implausible, but for the sake of argument — then what’s the point of making any change? The amount of extra revenue gained would be a rounding error in the overall Treasury budget, if that were really the case.
DeleteWhat's the point?
DeleteIt's called EQUITY - remember Adam Smith again?
It's called EQUITY - remember Adam Smith again?
DeleteAnd I'm perfectly happy with Adam Smith's definition of 'equitable' -- but Adam Smith's definition says nothing about whether rates of tax on earned income and capital gains should be the same. It just says that people with more means should be taxed more -- and that is achieved by having a tax rate of 24% on capital gains, because it means that someone with a capital gain of £1,000 pays £240 in tax and someone with a capital gain of £1,000,000 pays £240,000. That satisfies Adam Smith's fist principle of taxation, and is the current situation, so there is no reason to change it.
Oh dear- you really don't read well do you?
DeleteYour example is correct - it's equitable
However my post of several days ago - never replied to - commented that equity also means that those in broadly similar circumstances should pay the same tax
here's my example again. Please read it carefully this time
So If I'm an employee and get paid say £100k pa I pay the appropriate rate of income tax.
If I buy and sell shares on the stock market and make a £100k profit I'm taxed differently
As an employee I'd pay Tax c £27000.
As a trader I'd pay CGT of c £23000
As Adam would say - that's not equitable
equity also means that those in broadly similar circumstances should pay the same tax
DeleteNo it doesn't, because that's totally subjective: what is 'broadly similar circumstances' is a subjective judgement.
And subjective judgements don't belong anywhere near tax policy.
As Adam would say - that's not equitable
No. Adam Smith's principle is objective. Yours is a subjective impression, and therefore should not be taken into account at all.
If you can provide a precise objective definition of 'broadly similar circumstances' then I will reassess.
Certainly 'anyone who receives money from any source should pay the same amount of tax on it' is not a workable principle, which you have admitted by saying that even in your proposed system money from seed investments should be taxed less than money from publicly traded shares.
What planet are you on?
Delete2 people on the same income and, ceteris paribus, one paying 4k more tax and that's equitable?
Pull the other one
2 people on the same income and, ceteris paribus, one paying 4k more tax and that's equitable
DeleteOf course it wouldn't be.
But the whole point is that income from employment and income from capital gains are completely different in very relevant ways, so it's not ceteris paribus.
Same BS
DeleteIf I buy and sell shares on the stock market and make a £100k profit
DeleteIf it's so easy to make £100,000 profit on the stock market, and be taxed at low rate, why don't you do it?
Because you realise it's not that easy, and there's a high chance that rather than making £100,000, you will in fact lose everything.
Whereas if you earn that £100,000 as an employee then you are guaranteed that money (unless your employer goes bust, but that's a much smaller risk and even then you don't actually lose anything you already earned).
So the two situations are totally different, and there's no particular reason they should be taxed the same.
(The countries which do tax them the same tend to have much lower rates of tax on income than Britain does, which would go some way towards mitigating the damage of equalising them).