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.