More evidence that increasing the capital gains tax (CGT) rate means less money for the Treasury, not more.

Nigel Lawson increased the rate in 1988, aligning CGT with income tax (sound familiar?). What happened to the tax receipts? An immediate fall of 17.6%, and a further fall the following year. Overall the Treasury’s CGT yield fell by nearly a quarter over two years, despite the stock market growing.

Here’s the numbers:

Tax Year CGT rate £m    
1987/88 30% 2,175
1988/89 40% 1,792
1989/90 40% 1,658

Source: HMRC Table 14.1

CGT receipts didn’t get back to their old level until 1999, when Gordon Brown’s taper relief effectively lowered the tax rates. As we’ve said, higher rates don’t just damage the economy and destroy jobs – they collect less tax for the Treasury than low rates.

And that was just an increase from 30% to 40%, much smaller than the doubling (or more) that is being suggested now. If you’ve been reading other commentators, there is some incorrect data floating round claiming that CGT receipts increased when Lawson increased the rate. That is based on a misunderstanding of the tax system. Yes, Treasury data shows CGT receipts increasing in 1988/89, but CGT is collected a year (or more) in arrears, so the cash the Treasury received in 1988/89 was the tax for 1987/88, the last year of the 30% rate. The figures I have shown here match the tax collected to the year the sales took place, and so to the correct rates that were applicable.