Monday, 18 October 2010

Tax - not so simple?

It was Adam Hart-Davis who kept telling us that "Tax doesn't have to be taxing". He's realised that he was wrong, but there are some simpletons who think that tax is simple, you raise the rate and more comes in.

Simpletons like, for example, Vince Cable.

Having had the reality of a graduate tax explained to him by the more intelligent* members of the Coalition, that idea has gone away.  So now we just need to deal with his plans for CGT.

CGT is already silly enough.  In the past, I have had to pay CGT on the "profit" from a sale whose terms provide that I will be paid at a variable rate in the future. To pay the correct amount, I have had to tell HMRC what the future price would be, under pain of a fine if I underestimate.  What am I meant to do?  Get a crystal ball??

But that is by the by.  Cable would like to compound the silliness by raising the rate of CGT.  So here are some excellent posters which put the message across in terms even Vince would understand.

*OK, less daft

(Hat tip to the Angry Teen)


  1. The original point of CGT was to prevent the rich from avoiding income tax by paying themselves in capital. It actually makes sense on that level to align the rates again. Gordon Brown's CGT regime was - from an investment point-of-view - a fantastic setup in terms of encouraging investment without encouraging the wrong kind of speculation. The problem was that it allowed the kind of "banker pays less tax than cleaner" headline.

    The really clever thing to do would be to align income tax with the lower CGT rate rather than the other way around. Bring income and employment taxes down to very low levels and tax consumption instead. Simples.

    I suspect that this is what will happen if/when the deficit allows tax cuts.

  2. Yes, it's odd how anomalies are always resolved upwards :o) And, of course, it usually turned out that the banker paid a lot more tax than the cleaner, merely at a lower rate.

    CGT is justifiable as an anti-income-tax-avoidance measure, but it catches a lot of other gains. Such as the equity in my firm, which I originally had to acquire out of my taxed income; when I sell that, I have to pay tax again. As a result, CGT interferes with the introduction of new partners - not an intended consequence, I suspect.

    The problem with taxing consumption is that high indirect taxes lead to avoidance strategies - the cash-in-hand plumber and bartering amongst more reputable businesses. Generally, it used to be thought that the maximum rate of VAT that could be sustained without causing excessive avoidance was 15% or so, but that has been conveniently revised over time.

  3. P,

    They have simplified it for individuals to 18%, maybe that was because there was more work elsewhere in HMRC to be had at the time. The theory behind tapered relief was excellent because concentrating on short term returns is a problem in my opinion, but its implementation and policing must have been horrendous. I can't imagine how you cope with that with your business, but then don't partnerships operate under a different set of tax rules, like owner managed businesses?

    Vince is just not sophisticated enough, but his basic belief system is right. The banks know how to lobby too well and the economy needs diversification. The Tories are committed to boosting business so perhaps money can grow on more trees than just those in forestry? Finally, why on earth (or rather, in heaven) does cgt go up when you are dead? Trustees have to pay 28% on estates. It is all socialism through the back door and that kills motivation, still when you are dead, who is going to complain.