Mail on Sunday: The Lib-Con make things worse tax

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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.