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Weekend reading: Revolting taxes

Weekend reading: Capital gains tax

All hail John Redwood! Nicknamed ‘The Vulcan’ for his resemblance to a certain pointy-eared space elf, the MP for Wokingham is arguing against the Capital Gains Tax rise.

Good for Spock. Clumsy attempts by Liberal Democrats in line for a gold-plated, six-figure pension to judge what’s ‘fair’ with respect to investing cut little ice with me. I doubt most of them have ever risked more than the £10 they put into the ‘How Long Will Vince Cable Last?’ office sweepstake.

What’s fair about a small investor saving some of his after-tax income and risking it in the stock market rather than spending it – only for the Government to claim another 40% if he succeeds and not want to know if he fails?

I appreciate the motivation to reign in the private equity Mr Creosotes of yesteryear who made millions without risking their own money, not to mention bankers paid bonuses in options or similar to avoid income tax.

But creating a system that clobbers the little guy while trying to ensnare these Macavitys is like reintroducing the death penalty to cut short the odd serial killer.

Here’s some commentary on the tax revolt from around the web.

From John Redwood’s letter to the government, also on his blog:

I suggest that you tax gains of under one year as income. […] Longer term gains should be taxed at lower rates. If you taxed two year gains at 30% and three year gains at 20%, higher rates than the current one, you could tax gains of four years or more at 10%. I would myself go further and offer no capital gains after five years.

From Ian Cowie on The Telegraph:

Small investors will be hardest hit by any reduction in the Capital Gains Tax allowance and only trivial sums of extra revenue would be raised, according to HM Revenue & Customs’ own statistics.

These show that more than half or 53 per cent of all the people who paid CGT in 2008 – the last year for which HMRC has published figures – did so on gains of less than £25,000; a sum equivalent to the national average wage.

From Edmund Conway, also on The Telegraph:

At the very least, excessively high taxes deter people from working harder, or investing more.

This was the point Art Laffer made when he invented the Laffer Curve in the 1980s – updating Colbert’s point and convincing a generation of politicians, including Margaret Thatcher and Ronald Reagan, of the wisdom of low taxes.

It is the point the Adam Smith Institute is making today: it believes that raising capital gains tax would actually reduce the overall revenue the Government receives rather than increasing it.

Such was the experience of the US and Australia when they attempted to lift the CGT rate.

From CityWire:

Adrian Boulding, pensions strategy director at Legal and General, said there was ‘a whiff of retrospection about this change.’

‘The Lib Dems say the rate is too low but when the Treasury lowered the headline rate from 40% to 18% they also removed taper relief and indexation and the combined effect was an increase in tax take,’ he said.

‘If I could do two things to the policy it would be to reintroduce indexation and preserve the annual exemption. I think that would help protect those with long term investments.’

From The Motley Fool:

I Predict A Capital Gains Tax Riot

Stand up and be counted, you mild-mannered investors of England! (And Scotland, Wales and Northern Ireland, naturally). Alternatively, do what Redwood suggests and write a tough letter to your MP.

From the money blogs

Investing news from the big boys

  • The ketchup theory of inflation – The Economist
  • A coalition housing crash? – Peston of the BBC
  • Chocolate industry (and its fans) in peril – FT
  • The second hand VCT market – FT
  • Merryn capitulates on property, buys house – FT
  • Stamps as an asset class – FT
  • Would CGT increase trigger a housing market dip? – Telegraph
  • £50,000 to win in JP Morgan share trading game – Telegraph
  • How to fight rising inflation – The Independent
  • Have we fallen out of love with WHSmith? – BBC

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{ 15 comments… add one }
  • 1 Financial Samurai May 29, 2010, 3:07 pm

    Sounds like you aren’t pleased with liberals with massive pensions who want to raise taxes?! I might be wrong though.

    Your government imposed a 50% bonus tax on anybody making more than 34K pounds or something ridiculous. Time for them to impose another 50% tax and pay back that money who have nothing to do with your country!
    .-= Financial Samurai on: Who Needs A Job When You Have A Private School Degree =-.

  • 2 RetirementInvestingToday May 29, 2010, 3:35 pm

    Agree with you TI. It really does wind me up. In the UK today it is perfectly acceptable to spend every penny you own on all sorts of ‘tat’. However if you have £10 to your name then you are an ‘elite’ and have to share it with those ‘less fortunate’ than yourself.

    I work 60 plus hours a week and save 60% of my gross salary. This is because I don’t believe others should be expected to pay for my existence. However everything I have accrued feels like it is being grabbed at by the finance industry or big government.

    Taking care of your families future without others really shouldn’t be this difficult and should be encouraged.
    .-= RetirementInvestingToday on: Are the cracks starting to show in the Bank of England’s unspoken strategy =-.

  • 3 The Investor May 29, 2010, 4:16 pm

    @RIT – Thanks for your comments, I couldn’t agree more.

    @Sam – Well, as we’ve discussed I think the bankers tax (and banks in general) are a special case. They clearly work in an anti-competitive environment, where their relatively ordinary skills and talents (ordinary among high achievers I mean) are accordingly wildly disproportionately rewarded. Worse, they would and ‘should’ have eventually gone bust via market retribution, but politicians understandably didn’t want to allow that to happen. I don’t see why they should expect the rewards of being bailed out.

    But we’re never going to see eye-to-eye on this my friend. 🙂

  • 4 Aury (Thunderdrake) May 29, 2010, 11:10 pm

    I’ve been checking out some of the tax laws down there in the UK and suffice to say, you guys got it incredibly brutal down there. Proposterous to say the least.

    Having gotten into investing not too long ago, I’ve come to realize how important understanding tax law is. Those who don’t know it will certainly get burnt. I certainly don’t want to be participating in that kind of folly.
    .-= Aury (Thunderdrake) on: Hoarding Dragon Basics – The Stock Market =-.

  • 5 Forest May 30, 2010, 11:55 am

    Thanks very very much for including me in the roundup.

    The UK Tax is pretty brutal at times but I have always fared ok in it…. I guess I am a little bit of a socialist at heart so high taxes are to be accepted…. Granted though the country is in a bit of a pickle right now and the government is somewhat involved in the mess!!! From a small business perspective though I always seem to get some good breaks and don’t really pay a whole load compared to small business friends in USA.
    .-= Forest on: Baby Steps Towards Self Sustainability =-.

  • 6 roym May 30, 2010, 11:19 pm

    The Investor,

    what about property? i had to bite my tongue when partners in my firm (all of whom are easily on 200K+) sat around complaining about cgt and the effect on their housing portfolios. not just second homes, some of em had upto 6!

  • 7 Macs May 31, 2010, 12:44 am

    Why do I always have to reach for the air freshener every time the likes of the Telegraph start whining on behalf of the ‘little guy’? Must be connected directly to my BS detector, somehow… Let’s face it, if you’re making £10k in capital gains you are NOT the ‘little guy’.

    Is there any fundamental reason why capital gains should be taxed any more leniently than income which has to be worked for? Sure, I would love to (and intend to…) earn a livable income from investments, but I don’t see why I should pay less tax because I then have the luxury of not working. I will expect the same level of service from the State as I do whilst working, so don’t see that I deserve a ‘cleverness bonus’ because I’ve quit work.

    There are plenty of ways to shield from capital gains tax, if you truly are a ‘small investor’, such as ISAs. How many ‘little guys’ can use up their full S&S ISA allowance each year? I know I can’t, so spare me the Torygraph’s crocodile tears. So long as the marginal tax rate between income tax and capital gains tax is equivalent, I don’t see any unfairness whatsoever.

  • 8 The Investor June 1, 2010, 12:02 am

    @roym – Hmm, yes, I wrote almost all the above with share / business investing in mind. The breaks buy-to-let moguls have had for years have been breathtakingly skewed against owner-occupiers (tax relief on interest etc, ability to flip to cancel out CGT etc).

    With housing a limited but essential good, I can certainly see a case for CGT applying differently to property investment versus share/business investment. Also, in neither case am I saying no CGT.

    We all have our own ideas about the tax system, so looking at any one element in isolation might always seem a bit extreme. For instance, I’d happily levy Inheritance Tax at a far higher rate than even today (after some modest threshold). I don’t see it as a tax on the deceased’s income, but on an unearned windfall gain for someone else, that hampers social mobility. Spend (or pledge) your money when you live, and give your kids an education not a silver spoon I say.

  • 9 The Investor June 1, 2010, 12:15 am

    @Macs – Cheers for your comments, a few quick thoughts. Firstly, it’s very hard to earn a living from investing. Realistically you need capital of at least £500K, and probably more, to both grow your capital faster than inflation and at the same time to begin to approach an income. This is even assuming you can trade or similar ahead of the market, which is a big if indeed. (Yes Joe Bloggs did it spreadbetting from £10K in a bull market — I’m not talking about outliers here! 🙂 )

    There are many reasons for taxing capital gains differently. For starters it’s income being taxed twice effectively, just like inheritance tax. (The company profits are taxed, and your gross salary is taxed etc).

    Also, when you go to work you risk nothing. If I put money into a share, I am risking all the money going to zero. If it does, the best I get is the ability to offset it versus other Capital Gains — pretty cold comfort given that in contrast, if I realize a gain the government takes a cut, despite having zero risk. This sort of thing doesn’t encourage liquidity in the secondary market that makes the primary capital raising market feasible.

    Also, it’s ‘friction’, which distorts the efficiency of the market. I now have to hold non-ISA investments for longer to avoid realizing capital gains, rather than allocating my capital as and where I’d like without realising onerous charges.

    There are all sorts of other academic reasons, too, though I’m no expert (which are why some countries have zero rates – e.g. New Zealand, hardly a hotbed of social inequality. Even France is c.30%).

    It’s not hard to make over £10K of *potential* taxable gains in a year, if you’re in the business of turning over / liquidating even a relatively modest six-figure portfolio in a strong market. In reality you’d likely not realize all the gains of course, to avoid the certain loss through 40% tax under the new regime — and doing things to avoid tax is far from ideal when investing.

    ISAs, yes of course – I’ve been for my part urging people to use them for years, even to avoid paperwork! 😉

  • 10 The Investor June 1, 2010, 12:20 am

    p.s. An argument based on the fact that you in particular can’t use up an ISA isn’t really a basis for tax law, is it? 🙂 For instance, I’ve used every ISA allowance since 2003 (funded either salary or from transferring non-ISA’d pots of cash). As I’ve written before, my exciting media-related and somewhat de-railed ‘career’ was never compatible with superstar salaries, *and* I live in London…

  • 11 Neil Wilson June 1, 2010, 10:30 am

    The basis for capital gains is that it should just be classed as income, and taxed as such at your marginal rate. No extra allowance, just an indexation so that you don’t pay for inflation.

    Otherwise you are saying, effectively, that capital gains are ‘better’ than income. Firstly that means you have people chasing gains rather than income (which is one of the reasons we have highly leveraged property bubbles) and secondly you encourage ‘pump and dump’ private equity merchants in their asset stripping frenzies.

    Normal people do not pay capital gains. It is either wrapped in an ISA, or a pension plan. Even a buy to let is covered by loads of CGT reliefs.

    So I’m afraid this tax is sensible. It targets those who have made a lot of money out of the boom years. Since they were instrumental in inflating the bubble and externalising their costs in the form of the budget deficit, then it is only ‘fair’ that they should help pay it back.

    I don’t agree with the ‘taxing twice’ argument. If a company was a partnership, then you would be required to pay top up income tax on the profits every year. So by rolling inside a company you are already getting a tax deferral. CGT recovers that.

    If you take a risk with a share, then you expect to get an extra profit after tax. It is that extra profit after tax that is your reward – not some tax bung. If that’s not enough, don’t invest in shares. There is no benefit to society from you playing with shares, and therefore the income from it should be treated no differently from employment income or property income.

    Differential taxation is a stupid way to run a ship. We should have an income tax, and then levies on monopolies and externalities (which would include owning freehold property – which is the biggest monopoly of them all) to ensure that inefficient use is discouraged.
    .-= Neil Wilson on: A primer on Modern Monetary Theory (MMT) =-.

  • 12 The Investor June 1, 2010, 12:17 pm

    @Neil – Actually, 53% of CGT was paid by 130,000 logging gains of less than £25,000. Presumably your definition of ‘normal’ is ‘not wealthy’ which seems to be the prevailing stigma these days.

    Also, you write: “There is no benefit to society from you playing with shares, and therefore the income from it should be treated no differently from employment income or property income.”

    Actually, there is – it means that when people invest initially in companies, they expect there to be an active and liquid secondary market for them to sell their shares into, should they choose to. Without this active secondary market, companies would find it far more difficult and expensive to raise capital.

    Otherwise good points, well made, even if I disagree. 😉

  • 13 Russ June 1, 2010, 2:14 pm

    Thanks for the mention in your weekend reading post. I appreciate it.

    And I enjoyed checking out some of the other interesting posts you highlighted.
    .-= Russ on: A Complete Portfolio Is As Easy As Pie =-.

  • 14 Macs June 1, 2010, 5:06 pm

    Wow – new look to the blog! That was unexpected 😉

    I think I disagree on the ‘double taxation’ argument, too. That would also be the case, for instance, on the interest for a standard savings account – but that’s not why I disagree – the capital gain (or savings interest) is still EXTRA income, not the same income being taxed twice.

    I can see the argument for CGT not being 40% across the board, and agree with Neil Wilson that it should be applied at the individual’s marginal rate.

    I wish the tax system did revolve around my personal means, but that’s not too likely 🙂 The point I was making about ISA allowances is that most people don’t have that amount of unspent income (and we’d probably agree a lot more over the topic of WHY that may be the case 😉 ) and as such, ‘normal’ really and truly is ‘not wealthy’. That’s the condition of the majority, and that would seem to fit any definition of ‘normality’ without it being subjective.

    I think you countered your own case by pointing out that 53% of CGT came from 130,000 ‘smaller’ gains. We’re talking 130,000 out of how many taxpayers? 40,000,000 is it? 0.3% of all taxpayers at a guestimate. Surely that’s at least a couple of sigmas away from the median?

    One final point – you say no risk is entailed in employment. Restricted to ‘financial risk’, then maybe. But there is a health risk, sometimes even a mortality risk, and an absolute sacrifice of time that is guaranteed never to be returned. I don’t think investors have the short end of that particular stick, either. You don’t see many investors escaping the ‘risk’ to become bin-men (now lottery winners is a different matter 🙂 ) But of course, investors need people in employment to invest in, and the workforce need capital to have jobs, so they are just two wings on the same bird ultimately. But I’d be quite happy to shift to the other wing…

  • 15 The Investor June 2, 2010, 8:41 am

    @Macs – You and Neil are both making your points very well, and there are certainly two sides to this argument. I’ve made most of my points in my posts, so I won’t repeat myself here.

    Perhaps a compromise that would work for me might be to move to the income linked CGT but to increase the CGT threshold to say £25,000 a year, to increase with inflation? That, together with ISAs and (for those who like them!) pensions might give sufficient flexibility and protection to the ‘small guy’ – which I define to include the prosperous and aspirational middle-class who for political and economic reasons I believe we shouldn’t clobber at every turn, even if s/he happens to lie outside the mass. Yet it would not do much for the millionaire Private Equity folk and mobile super-rich who are being held up as a reason why CGT has to rise, if we assume we want to squeeze the latter til they squeak. (I don’t, as I’ve said, and was happy with 18% CGT and far more of them not bothering to avoid paying it or investing abroad or what have you).

    Regarding the risk of employment, the comparison was being made with an employee and a full-time investor (who incidentally I’m not suggesting CGT should be particularly lax for – I’m thinking mainly of investors who also work). My point there is the full-time investor requires realistically £0,5 – £1m to get into business, which will generally have to have been acquired elsewhere previously. They are genuinely risking their capital investing into businesses, which they could instead spend on hot tubs, ice creams and Xboxes. If you had to buy your job like in some pre-industrial feudal system, then that comparison might stand.

    Also, a full-time trader will be prone to health risks and mortality risks as another office worker, and perhaps rather more at risk from a heart attack or, if the stats on traders are to be believed, heavy drinking! 😉

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