Why Capital Gains Tax Rates cannot be the same as Income Tax rates
We’re never short of bad ideas, of course. One of the current ones is that Capital Gains Tax rates should be the same as income tax ones. ‘S obvious, innit? And, well, no:
A 30-year freeze on compensation for victims of crime should be lifted, campaigners have said, adding that the maximum of £500,000 is insufficient to plan for a lifetime.
The current highest rate, set in April 1996 by the Criminal Injuries Compensation Authority (CICA), is paid to victims of crime in England, Scotland and Wales who have suffered severe life-changing injuries, including brain damage and paralysis.
The money is paid to provide for their care as well as their long-term future, as their injuries often mean they are unable to work.
However, new figures suggest that had the maximum amount risen in line with inflation, it would stand at £1,015,000, more than double the current limit.
One of the delights of economics - as with mathematics - is that we can extract the general from the specific. If 500 then is 1,015 now then that works for the value of compensation, that works for what is the profit on an investment? For it’s the same calculation, how much has government destroyed the value of money by intemperate, possibly excessive, printing of it?
So, using the current top rates just to use some set of rates, imagine that someone did invest £500k and it had simply tracked inflation since then and is now worth £1,015. Under current CGT rates that “profit” would be taxed 0.24 x £515k = £123,600. If we equalised rates then 0.45 x and thus £231,750. In both cases no economic profit, or adjusting for inflation no even accounting profit, has been made. Yet a significant tax bill is due. Taxing people a profit or gains tax on what is not a profit nor a gain is a bad idea.
The reason we have 18 and 24% CGT rates is that, around and about, such rates collect the same amount of money as if we had the earlier 40% rates but adjusted the profit, or gain, for inflation.
From which we can see that current CGT rates are too high, not too low. But we still ever have those bad ideas to deal with, don’t we?
As an aside we did very like a claim we saw recently but cannot recall where. OK, so incomes should be taxed as incomes, whatever their source. Certainly a starting point for discussion. GDP is, in one calculation, all incomes. By definition it’s all incomes. But capital gains are not within the GDP calculation by incomes. Therefore capital gains are not incomes. Leaving that room for us to return to the sensible pre-1960s taxation system where capital gains were taxed not at all - for they’re not incomes, d’ye see?
Tim Worstall