Coalition must listen to City on CGT

Allister Heath
IT is not often that a major City institution is willing to go on the record with its opposition to a key government policy – usually, the big firms hide behind off-the-record briefings or industry lobby groups. So kudos to Fidelity, the fund manager, for yesterday demolishing so eloquently the coalition government’s plan to hammer savers and investors with a hike in capital gains tax. Let us hope more large firms follow suit.

The planned tax grab has provoked outrage in the City, among investors and among all of those who have been struggling, often against the odds and at a heavy personal cost, to build capital to pay for a new home, their children’s education or their retirement. Hence our campaign launched today, to convince the government to think again; we urge everybody who agrees to write in. Already, many leading figures have signed up, including Jon Moulton, Luke Johnson and Terry Smith (see p1).

If the plan goes through, prudent, long-term savers and wealth-creators would be penalised for doing the right thing. Discouraging capital accumulation will only make even more people reliant on the state, especially given that so many have lost confidence in traditional, tax-exempt retirement schemes (partly as a result of a previous tax raid, this time by Gordon?Brown on pension funds in 1997).

There are four other reasons why capital gains tax should not be hiked:

•an economic one: we should encourage the creation of capital through investment, not tax it; the more capital in a society, the higher people’s incomes.

•a philosophical one: capital gains tax on shares and property are a kind of double taxation. Dividends and rents are already subject to tax.

•a practical one: it will not raise, much, if any, money.

•a prudential one: a hike in capital gains tax will make equity even less appealing as a source of financing, compared with debt.

Raising capital gains tax without reintroducing indexation for inflation would have a devastating impact. Fidelity calculates that someone who invested £10,000 in the FTSE All Share in 1988 would currently face a tax bill of £9,910, their shares having increased to £75,155. If the tax were increased to 40 per cent without indexation, this would rise to £22,022. Crucially, a large chunk of these gains are merely inflation – they do not denote a real rise in value. It is wrong to ask people to pay tax on this.

There is huge amounts of evidence that hiking capital gains tax does not actually increase tax receipts – and that cutting it boosts revenues, by making people more likely to realise gains and by enhancing the value of assets. In the US in 1996, the year before the capital gains tax rate was cut from 28 to 20 per cent, net gains on assets sold were $335bn. A year later, gains had leapt to $459bn. (The cut was retroactive to May 1997.) In 1996 the Treasury collected $85bn in capital gains tax; in 1997, $100bn.

Some people may wrongly be claiming some of their income as capital gains. If so, the law could easily be changed to stamp this out. But as the coalition well knows, only private investment and entrepreneurship can create a sustainable recovery – this should be encouraged, not taxed to death. A total climbdown may be impossible politically; but the coalition must now propose an amended, less damaging plan before this row spirals out of control.