Higher capital gains rates hurt the economy

John Redwood
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THE government has said it wishes to assist a substantial private sector led revival. It needs a policy which allows reasonable freedom for people to invest, encourages those who are responsible and who make provision for their families and their futures, and is fair.

I suggest that gains of under one year are taxed as income. I would suggest they are taxed at 40 per cent for higher rate payers, as the 50 per cent rate is a temporary measure.

There is some suggestion that longer term gains should also be taxed at 40 per cent with reliefs for business assets. This would deal with one of the more damaging features of a high CGT rate regime, allowing entrepreneurs to set up and grow businesses which they can subsequently sell without paying a penalty rate. However, it would leave long term savers, people owning buy-to-let properties, and people with savings for retirement which are not held within a pension fund having to pay substantial tax.

The US and UK have both shown in the past that raising CGT rates cuts revenue. In the case of the USA the figures are dramatic. In 1981 the US collected $28.5bn with a tax rate of 24 per cent. In 1982 they raised $26.95bn with a lower 20 per cent rate, only to see receipts soar to $37.85bn the next year and as high as $97.33bn in 1986.

In 1987 they raised the rate to 28 per cent. Revenue plunged to $59.83bn. They raised it again to 33 per cent. Revenue briefly rose to $66.23bn in 1988 then plunged again to $57.3bn, lower than when the rate was 28 per cent and well below the levels when they had a 20 per cent rate. In 2002 they raised $55bn with a 20 per cent rate. In 2004 this soared to $78bn by lowering the rate to 15 per cent. In 2006 they were bringing in $110bn at the 15 per cent rate.

I therefore suggest that longer term gains should be taxed at lower rates. If you taxed two year gains at 30 per cent and three year gains at 20 per cent, higher rates than the current one, you could tax gains of four years or more at 10 per cent. This should increase the total revenues from CGT by the second year, and offer a stimulus to longer term investment. I would myself go further and offer no capital gains after five years, to send a strong signal to the world’s investors that the UK is back in business as a favourable location.

I have been swamped with support for these suggestions, both from around the country and from Conservative MPs. It would send a strange signal if a Lib-Con government decided to more than double the CGT rate set by a Labour government. It would damage the revenues and be unfair to anyone who saves, is prudent, or who ventures their money for the greater good.

John Redwood is the Conservative MP for Wokingham. This column is a version of the letter he sent to the Treasury.