22 May 2010
The coalition Government's proposal to put up capital gains tax will result in less revenue for the Treasury, says a Right-leaning think-tank.
The Adam Smith Institute says increasing capital gains tax will widen the deficit rather than narrow it.
The Conservatives and Liberal Democrats have agreed to tax non-business capital gains at rates "similar or close to those applied to income". This means the tax could be increased from its current level of 18 per cent to 40 per cent or even 50 per cent, depending on the level of income tax people pay.
But in a report published today, the institute says investors believed the measure would be temporary and would therefore defer capital gains realisations until the rate reduced again. This would lead to a "sharp decline" in tax revenues.
Its president, Madsen Pirie, said: "In intending to tax the rich, politicians, without understanding the effects of their actions, are proposing measures which will decrease the Treasury's tax take and make the deficit even worse. This hardly qualifies as sensible economic policy."
The report found that capital gains tax rises in the United States and Australia had led to reductions in revenue. Conversely, decreases in the tax led to rises in revenue.
The institute said it was "highly likely" that these negative revenue effects of a rise in the tax would be more accentuated in the UK because investors realised there was a "cited short-term need" to raise revenues to pay down debt.
Any increases in the tax would be introduced largely for political reasons and not as a result of evidence-based policy-making.
Investors also understood that the "major party within the coalition does not believe in the CGT tax increases and will seek an early opportunity to reverse them".
The institute said revenues fall when the capital gains tax rate rises because they are "voluntary taxes", unlike income taxes.
The report said: "While everyone needs to work and bring in an income, the same is not true of making capital gains.
"No one needs to pay capital gains taxes except in times of financial distress. Taxpayers can simply avoid selling assets that are subject to the tax and also avoid buying assets that are subject to the tax."
Published in Yorkshire Post here.Read more...
22 May 2010
THE plan to raise capital gains tax will cut revenue for the Treasury, a think-tank warned yesterday.
The Adam Smith Institute said increasing CGT would widen the UK’s deficit rather than narrow it.
The new coalition government has agreed to tax non-business capital gains at rates “similar or close to those applied to income” meaning CGT could soar from its current level of 18 per cent to 40 or 50 per cent, depending on the level of income tax people pay.
But in a report the ASI said investors believed the measure would be temporary and would defer capital gains realisations until the rate fell again, leading to a “sharp decline” in tax revenues.
The Treasury said: “There are a range of possible options to fulfil this aim on capital gains tax and no decision has yet been taken.”
Published in the Daily Express here.Read more...
22 May 2010
The coalition Government's proposal to put up capital gains tax will result in less revenue for the Treasury, a right-leaning think-tank has warned.
The Adam Smith Institute (ASI) said that increasing capital gains tax (CGT) would widen the deficit rather than narrow it.
The Conservatives and Liberal Democrats have agreed to tax non-business capital gains at rates "similar or close to those applied to income".
This means CGT could be increased from its current level of 18% to 40% or even 50%, depending on the level of income tax people pay.
But in a report published on Friday, the ASI said investors believed the measure would be temporary and would therefore defer capital gains realisations until the rate reduced again. This would lead to a "sharp decline" in tax revenues.
Madsen Pirie, ASI president, said: "In intending to tax the rich, politicians, without understanding the effects of their actions, are proposing measures which will decrease the Treasury's tax take and make the deficit even worse. This hardly qualifies as sensible economic policy."
The report found that CGT rises in the United States and Australia had led to reductions in revenue. Conversely, it was decreases in the tax that had led to rises in revenue.
The ASI said it was "highly likely" that these negative revenue effects of a CGT rise would be more accentuated in the UK.
This was because investors realised there was a "cited short-term need" to raise revenues to pay down debt.
Any CGT increases would be introduced largely for political reasons and "not as a result of rational, evidence-based policy-making".
Published by Press Association here.Read more...
22 May 2010
The coalition Government's proposal to put up capital gains tax (CGT) could result in less revenue for the Treasury, according to the Adam Smith Institute.
The Conservatives and the Liberal Democrats have agreed to tax non-business capital gains at rates "similar or close to those applied to income".
This means CGT could be increased from its current level of 18 per cent to 40 per cent.
But, in a report by the Adam Smith Institute, investors are said to believe the measure would be temporary and would defer capital gains until the rate reduced.
The reports said: "Taxpayers can simply avoid selling assets that are subject to the tax and also avoid buying assets that are subject to the tax."
Madsen Piries, president of the Adam Smith Institute, said: "In intending to tax the rich, politicians, without understanding the effects if their actions, are proposing measures which will decrease the Treasury's tax take."
Published on ITN.co.uk here.Read more...
Written by Michael Forsyth
19 May 2010
When, in 2008, Gordon Brown introduced a flat rate of capital gains tax at 18 per cent, he also simplified the system. This involved removing a complex labyrinth of allowances and reliefs, which treated different types of assets in different ways and took account of length of time in ownership and the effects of inflation.
From a government that had more than doubled the size of the tax code, it was an unusual and welcome step. George Osborne had quite rightly campaigned in opposition for simpler, flatter, fairer taxes. This marked a victory for his approach.
Of course, Brown went on to increase the top rate of income tax to 50 per cent, creating a greater incentive for people to invent schemes to achieve returns which are taxed as capital gains rather than income. The problem we have, then, is not that capital gains tax is too low, but that the marginal rate of income tax is too high. The independent Institute of Fiscal Studies, the Centre for Policy Studies, the Adam Smith Institute and a chorus of others have warned that the increase to 50 per cent is unlikely to produce additional revenue.
Published in the Telegraph here.Read more...
Written by Dr Eamonn Butler
18 May 2010
New Zealand’s Labour government in the 1980s turned around a country gummed up by regulation and fat government. They introduced inflation targeting to make their money sound again and set entrepreneurs free by pruning regulation department by department, quango by quango.
An offbeat but important part of New Zealand’s revolution was to make its government follow the same international accounting rules it imposes on everyone else. In other words, when politicians make promises – higher pensions, bigger benefits, more new schools and hospitals – they have to identify and provide for their future cost. No living high on the hog today and leaving our children with the debts to pay.
he East European republic of Georgia turned itself round by imposing strict rules on government spending. President Mikheil Saakashvilli wants a constitutional amendment to cap government spending at 30 per cent of GDP, the budget deficit at 3 per cent, and the national debt at 60 per cent of GDP so future Georgian governments won’t be able to get into the same pickle that Gordon Brown has got us into.
We also need a version of America’s 1989 President’s Council on Competitiveness, which subjected every new legislative and regulatory proposal to analysis by economists and accountants, to challenge the spin and calculate their real economic burden on trade, competitiveness, and jobs. (Not surprisingly, few ideas from Congress survived.)
America can also teach us about sunset rules on quangos – if their lives are not consciously renewed each five years, they expire. And budget ballots, too – many US localities require a public referendum to approve the state budget. No agreement by the people, and the politicians can’t do anything at all.
Published in the Telegraph here.Read more...
16 May 2010
Tom Clougherty of the Adam Smith Institute discusses the need for the government to go further than efficiency savings and to consider cuts in the public sector pay role.
(approximately 40minutes into the programme)Read more...
Written by Dr Eamonn Butler
16 May 2010
Our new prime minister and his deputy agree: our government has been spending and borrowing too much. Good, as Alcoholics Anonymous might say — admitting your problem is the first step towards dealing with it.
The new Treasury team might actually manage to re-cork the bottle. George Osborne, the chancellor, is blunt about wanting to balance the budget and David Laws, his Liberal Democrat deputy, is also known to be a hawk on economic matters. It bodes well, too, that Iain Duncan Smith, who knows how to get people off welfare and into work, is now installed at work and pensions.
The message they are all receiving is clear: we must spend less and work more. Intentions, however, are not enough because fiscal alcoholics have a habit of telling themselves that just one more little splurge can’t hurt.
Remember Gordon Brown’s “golden rules”, which stipulated that the government should borrow only to invest and it should keep its debts “prudently” down to about two-fifths of what the nation earns? Unfortunately, he fudged the first rule, showering us with treats on tick, and abandoned the second when the going got tough.
The world’s central bankers have warned us that if Britain carries on in this fashion, our debts will rocket to five times our earnings by 2040. Even with firm action they are expected to soar to three times earnings.
So we need new rules on the public finances that politicians can’t wriggle out of — if not constitutional restraints, then at least limits that cannot be brushed aside for the sake of political convenience.
That’s why I want to propose a new economic responsibility act, which would set in stone the spending and borrowing targets to be hit by the end of the coalition’s five-year term.
Here are my suggestions:
— Cap the budget at one-third of gross domestic product, so the government can’t spend more than £1 for every £3 that the nation earns. The experience of other countries tells us this is as much as the public can bear before it starts concealing income or voting out governments. This cap should be set on the basis of what we’ve actually earned, not on the jam-tomorrow budget forecasts of over-optimistic chancellors. And if the economy nosedives, it’s not just private sector workers who should suffer pay and job cuts — government programmes would have to share the pain, too.
— Cap the deficit at 3% of GDP — the limit that “prudent” Brown commendably foisted on his government and the European Union. Three per cent gives a bit of flexibility but keeps the total debt under control.
— Cap the national debt at 40% of GDP. Without strict limits, as recent times have shown, government debts spin quickly out of control. In 1997 the debt was £350 billion. Now it has more than doubled to £770 billion. It is expected to double again to £1,406 billion in five years’ time. Now I would love to be able to double my own borrowings whenever I liked — but that would just encourage me to live beyond my means; pretty soon, lenders would get nervous and want their money back. The same applies to governments. The international agencies that rate our creditworthiness think that a debt of 40% of GDP is sustainable. It’s a good target.
— No off-the-books fiddling. Brown claimed that his borrowings were scarcely more than those of other European countries. But many other commitments that he made, a dozen times larger, are conveniently unrecorded in the Treasury’s books. Why? The government requires companies to state their future commitments, such as staff pensions. But its own civil service pensions, not to mention future state pensions and contractual payments to school and hospital builders and countless other items are never accounted for. That must change.
— Borrow only to invest. It makes perfect sense, but Brown kept labelling his spending as “investments” for the future. In fact, most of his vast budget increases went on hiring more public workers and raising their wages.
— Limit tax rises. High taxes choke off investment and growth, which are our only way out of this slump. I suggest we hold public referendums before any tax rises and before any local government budget is approved. And the office of budget responsibility should be given full power to block counterproductive rises — such as the 50% envy tax that will drive high earners abroad.
Am I being too hard on a new and well intentioned government? Alas, even the most “prudent” politicians cannot always be trusted. So we need these strict rules to protect our personal and public finances. Only from that solid, restrained foundation can we build Britain’s future economic growth.
Dr Eamonn Butler is director of the Adam Smith Institute and author of The Rotten State of Britain
Published in the Sunday Times here.Read more...
Written by Dr Madsen Pirie
16 May 2010
The new Conservative-led coalition is attracting much goodwill and support, and deservedly so.
But if it goes ahead with one of its tax proposals, its support among its core supporters could ebb away very rapidly.
The proposal, which comes from the Liberal Democrat side of the coalition, is for Capital Gains Tax on non-business assets to be raised to the same level as income tax.
If it goes through, it means that people who have put savings into shares, second homes and other assets, or into funds which invest in these, will have the tax on any increase in their value raised from 18 to 40 or even 50 per cent for higher rate taxpayers.
The exact amount is yet to be decided. But, with the economy struggling, any significant rise will have serious consequences.
Worse still, it has been suggested that the tax-free allowance for capital gains could be reduced from £10,000 to possibly as little as £2,500.
In some ways this is a more dangerous move still, as it would draw thousands of small shareholders into this punitive net.
The demands for a rise in CGT has come from the Lib Dems in an attempt to raise as much as £4billion. It has sent shockwaves among those anticipating more sensible economic measures from a Conservative-led Government.
Traditional Tory voters certainly did not expect yet more punishment for productive members of the economy and there is likely to be a political backlash.
Anyone with investments in second properties, holiday homes or buy-to-let flats would probably be affected (although strictly defined business assets are exempt, along with first homes).
As a result, there will be what some observers have called ‘a fire sale’ of properties, as people rush to escape the tax. Others have said it could profoundly hit the attractiveness of the UK as a place to do business.
Moreover, it is scant reward for bewildered investors who have done as they were asked and made sacrifices now in order to provide for security and comfort in their old age.
It is far from clear how many people will be hit. Much depends on where the Government places the tax-free exemption.
But it is fair to say that the biggest losers will be the hard-working middle classes, particularly those who, after years of bringing up children, have finally acquired some surplus capital in middle age.
Savers already have a hard time. The new plan to hike CGT will make things considerably worse. Not only is the tax itself bad, even the reasoning behind it is flawed. The justification is that capital gains should be taxed the same as income to stop people switching their reward from salary into capital gains just to avoid taxation.
Yet hardly anyone in Britain has that option. Most are on salaries or wages and simply have no opportunity to switch from that.
Not so long ago saving was rightly esteemed. Parents taught their children the merits and the benefit of thrift. It was a way of putting together enough money to buy what you could afford, or of making provision for a rainy day. Most of all, it could provide security and independence in old age.
For more than a decade now, saving has been denigrated as if it were somehow selfish and spending has been encouraged instead, fuelling a consumer boom which has strengthened foreign manufacturers and weakened our domestic institutions.
Instead of saving up for what we can afford, we have been urged to buy now and pay later. The attack on savers has been long-running and remorseless.
What, you might ask, has turned us into a nation of reckless spendthrifts? Part of the answer lies with Government. Indeed, the process started on the very first day that Gordon Brown moved into the Treasury. He brought with him a mindset that derided saving.Spending was promoted instead because, we were told, it protected jobs. As long as people kept on buying, he told us, businesses would be safe.
Such a view is sadly deluded. If savers put their money in gold bars and buried them in the garden, there might be a case for such an argument.
But this is not what savers do. Instead, they put their money into banks and savings funds and it is invested on their behalf.
Traditionally, people who worked hard and lived sensibly would put money aside where it would earn interest to help to maintain their standard of living in retirement.
Their savings would be placed in building societies, where they would provide mortgages for younger people to buy homes, or High Street banks, where they would be reinvested to provide working capital for local entrepreneurs building up their businesses. Everyone benefited.
Now, thanks to the credit crunch, this is no longer happening. Savings accounts offer interest rates close to zero and what interest is paid is taxed at 40 per cent, so no money is going into banks and none is coming out to fund new homes or growing businesses.Instead, over the past 18 months, savers have put money into shares, which have risen steadily.
The stock market provides the capital for large-scale industry – it was by issuing new shares that Lloyds Banking Group raised the funds to restructure itself after the disastrous takeover of HBOS. Dividend income on shares is already taxed at 40 per cent. If capital gains are also taxed at up to 40 per cent there will be no more point in savers buying shares than in putting their money in bank accounts paying virtually no interest.
Those with money to save will come to the conclusion that if they can’t take it with them when they die, and they can’t invest for their children, they may as well blow it all on a world cruise.
But that is not the end of it. Under the new Con-Lib Dem proposal, the Government will take 40 per cent of any money you make, whether it’s income from your job or from your investments.
As a general rule, responsible individuals spend money wisely, Governments spend it foolishly.
Under our vast and ever-growing tax and benefit system, the Government takes money from people who live carefully and sensibly and hands it on to people who live foolishly.
Eleven million people voted Conservative at the General Election to put a break on this process. They will not like this new attack on savers.
Published in the Mail on Sunday here.Read more...
12 May 2010
Written by Dr Madsen Pirie
Tony Blair spoke of "education, education, education", but David Cameron's focus must remain economic, says Madsen Pirie, an advisor to the last Conservative administration.
Tony Blair left no doubt as to his top three priorities: “Education, education, education.” Given the current state of education in Britain, it could be argued that he failed to succeed with any of them.
The top five priorities of the new government are more clear and more urgent. They are the economy, five times over. Unless the economy is put right, everything else will fail. Unless Britain earns its keep, pays its way, and generates new wealth, there will be no funds to support any of the ambitious projects that the new partners want to achieve.
Despite Britain’s overhang of debt and the parlous state of public finances, there are promising signs that things can be done, not least because both coalition partners recognize the problems.
One of those economic priorities is taxation. Gordon Brown has left a shambles, with low earners paying so much tax that they have to be helped by credits and welfare payments. The good news is that one coalition policy already agreed is to lift the starting tax threshold to £10,000.
This would lift 3.6m low earners out of income tax altogether - making work more attractive than welfare for the low paid, and will considerably reduce welfare spending.
Another priority is the deficit. Both partners want spending cuts, and must now urgently identify their targets. Scrapping identity cards will be a good start, but then comes the painstaking process of identifying the needless spending and unproductive jobs and practices that permeate the public sector. The Lib Dem proposal for a value-for-money commission is one the Tories can embrace heartily. A trawl through the spending of local authorities will expose wasteful and unproductive spending.
Spending cuts alone will not do it, however. There must be a boost for business. Scrapping the National Insurance "jobs tax" increase will only be the start, and the Lib Dems must quietly bury the idea of raising capital gains tax from 18 per cent to 50 per cent - it must be kept low to boost new business and the jobs it creates.
The coalition should protect small and new businesses from many taxes and regulations until they grow large enough to cope with them. They should be protected and nurtured like greenhouse plants, because they represent Britain’s economic future.
Not least among the economic priorities must be the complete modernization of the way the Treasury manages our economy. It must be updated and streamlined, with clear principles replacing antiquated practices. The Treasury must be made to count the likely benefit of new policies, as well as their costs. It will be revolutionary, but this is a time for revolutions.
The final economic priority is pensions, which must be restored to their healthy pre-Brown state. It has to be worthwhile for people to save, without fear of those savings being taxed. And gold-plated public pensions far in excess of those available elsewhere have to be brought into line. Their unfunded liability simply cannot be afforded.
The other priorities include crime, immigration, educational standards, and welfare dependency, among others. But economic priorities are the top five. If the new Government gets those right, it will have the time and resources to tackle the others.
Published in the Telegraph here.Read more...