Thursday, 18th October 2007

That Abolition of Taper Relief

11:08am I've noted a couple of times here that I wasn't sure how anything could be done to change the taxation of carried interest without also changing the taxation of sweat equity: or of capital gains as a whole. Seems I was right:

Almost six million people who invest in employer share schemes face an 80 per cent tax rise from next year.

Ouch, that's gonna hurt.

The figure is more than three times higher than previously estimated, Mark Neale, the managing director of tax at the Treasury told MPs yesterday.

He said that 5.87 million people, including 470,000 executives, who invest in the save-as-you-earn schemes could be hit as a result of capital gains tax reforms in the Government's Pre-Budget Report. A further 4.5 million small businessmen and entrepreneurs could also be hit.

So well done to the Guardianistas then. In order to get at a few thousands of private equity managers you've changed the tax treatment of some ten million people. Isn't that wonderful?

Now while I do agree that the Laffer Curve exists I'm not sure that we are to the right of the peak on CGT (for of course each tax will have its own curve) in the UK at present. So I won't insist that this change will bring in lower revenues than the earlier situation. But I wll insist that we need to mark this dynamically (that is, taking into account the change in behaviour that changes in taxation bring about) rather than statically. Further, we need to do this in the long run, not the short term of a year or three (for tax revenues in the next few years will be coming from decisions that were made before the changes, of course).

I think it would be interesting to know actually, will this tax change, in the long run*, actually increase revenues or not?

* Yes, I'm aware that this is to ask the question of whether we are to the right or the left of the peak of the Laffer Curve: but I'm thinking that short and long term such curves are in fact different.