THE GOVERNMENT should abolish capital gains tax (CGT), Tory peer Howard Flight claimed in a research paper released by the Centre for Policy Studies yesterday.
However, the government must first cut the rate to 25 per cent or less, the report, prepared by Flight and Cambridge post-graduate economist Oliver Latham, says.
If it can summon the political will, the coalition then ought to slash the rate further, eventually to zero, the paper recommends.
“The additional revenue resulting from this extra growth could fund as much as 70 per cent of the cost of a cut,” the report says.
Even under pessimistic assumptions a return to an 18 per cent rate would only cost between £300m and £900m – between 0.05 per cent and 0.15 per cent of total government revenue – they claim.
Rich, dynamic economies such as Singapore, Switzerland and Hong Kong charge no capital gains tax, the report points out, and the UK’s 28 per cent rate puts it near the top of the pack of developed nations.
The tax discourages entrepreneurship, savings and investment, thus harming growth, the report argues. George Osborne and the Treasury claimed that the optimal CGT rate was 28 per cent with a top tax rate of 50 per cent, to prevent income being passed off as capital gains. However, that implies CGT should fall now the top rate of tax is falling to 45 per cent, the CPS report argues.
The report argues that the tax also distorts capital markets by encouraging individuals to hold onto assets, even where society would benefit more if the assets changed hands.
Similarly the large array of exemptions splinters markets further, channeling capital into tax-exempt, rather than profitable and socially-useful areas. These exemptions are a tacit admission of the tax’s flaws, Flight and Latham say.
The think-tank report claims to have a solid theoretical grounding.
“The logic for low capital taxes is powerful,” reads a widely-cited 2009 paper from Harvard professor Gregory Mankiw. “Capital taxes yield large distortions to consumption plans and discourage saving – [and] capital accumulation is central to the output of the economy,” the paper argued.