Peter Young

To increase capital gains revenues cut rates, don’t increase them

To address the deficit, George Osborne will probably have to raise taxes. This is a grim truth to which most people are reconciled. But raising taxes and raising revenue are two different things. If the Chancellor is serious about closing that deficit, then he would doubtless be interested in the idea that a Capital Gains Tax raise from 18 per cent to 50 per cent might be a chimera tax. That is to say, one which raises no money at all. Worse, in fact, the odds are that tax revenues will fall and the deficit will be made worse by this tax rise.

The international evidence is absolutely clear. As sure as night follows day, tax revenues go down when CGT rates go up. Revenue rises when CGT is lowered to a rate which is attractive to investors (and this includes those investing in a second home by means of pension provision). The chart below provides the US evidence, where CGT rates have changed significantly over recent decades:

A few highlights from the post-war American experience with Capital Gains Tax:

i) Between 1968 and 1972 rates increased by 10 percentage points and revenues
fell 21%.
ii) In 1978 the rate fell from 35% to 20% and revenues increased by 46%.
iii) In 1986 the rate was raised to 28% and by 1991 15% less revenue was being
raised
iv) In 1996 the rate was reduced to 20% again and by 2000 revenues had grown
by some 50%
v) In 2003 the rate was cut to 15% and revenues again grew very sharply.






Other international evidence paints a similar picture. After Australian CGT rates for individuals were halved in 1999, revenue from individuals nearly doubled over the subsequent nine years.

Why this strong effect? Working is compulsory: income taxes can guarantee a haul (up to a certain level.

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