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It would be mad to hike capital gains tax

Allister Heath
FOR all of Gordon Brown&rsquo;s increasingly laughable attempts at dissembling on the matter, there is absolutely no doubt that public spending will have to be slashed after the general election, regardless of who wins. Alistair Darling said as much yesterday, and that was also the implication of the comments from John Hutton, the former defence secretary, about the need for honesty in spending. The only questions are how large the cuts will have to be, where they will fall and whether, as Sir John Major is warning, they will be accompanied by tax hikes.<br /><br />My own fear is that the present or even the next government may feel it needs to increase capital gains tax, which would be an absolute disaster for the economy. The problem is that Gordon Brown&rsquo;s destructive increase in the top rate of income tax has led to an even greater gulf between the tax on capital and the tax on income. This will increase the incentive for many individuals and firms to shift compensation from wages to equity to try and avoid some of the extra tax, a process which will infuriate HMRC and sooner or later lead to a &ldquo;crackdown&rdquo;. There were already stories at the weekend about banks finding creative ways of paying out bonuses to minimise tax rates (for example, by giving out stock options, which are eligible for capital gains tax, rather than cash, which falls under income tax); expect far more of those in the days to come. The unintended consequences of one disastrous move &ndash; hiking income tax &ndash; could therefore easily trigger another stupid decision &ndash; an increase in capital gains tax. <br /><br />Brown last year replaced a range of capital gains rates between 10 per cent and 40 per cent with a single 18 per cent rate on all assets; in a little-noticed secondary blow to investors, it also eliminated inflation indexation. The &ldquo;reform&rdquo; hit small firms the hardest; but while a bitter blow for Britain&rsquo;s battered entrepreneurial culture, at least our present rate of capital gains tax remains manageable. That is not the case with the new top rate of income tax of 50 per cent, together with higher national insurance contributions, the elimination of the zero-rated allowance and drastic cutbacks to the tax advantages of pensions. Those earning between &pound;100,000 and &pound;107,000 will be hit by a 61.5 per cent tax; those on above &pound;150,000 will lose 51.5 per cent of any extra income they earn, even before the tax changes to pensions are taken into account.<br /><br />Yet it would be madness to increase the 18 per cent capital gains tax rate. It is one of the last of Britain&rsquo;s tax advantages. It sends a signal that creating value and capital is recognised and respected. It encourages self-employment and the setting up of new businesses and entrepreneurialism in general. The higher income tax rate won&rsquo;t bring in any extra revenues and could even lead to a fall in tax receipts; a higher rate of capital gains tax would have an even more devastating effect. It will reduce the creation of new enterprises as well as sensible risk-taking. It will devastate all those who have invested in property or other assets outside of traditional pensions to provide for their retirement. There is only one workable way out of our current fiscal mess. We need to slim down our government and spend less as a share of our national income. Brown, Darling and even the Tories need to remember that no nation has ever taxed itself back to prosperity.<br />allister.heath@cityam.com