The Adam Smith Institute has warned that Liberal Democrat plans to raise Capital Gains Tax – forced on George Osborne by the Coalition deal – may cost revenue.
Deawing on international evidence of CGT rises, the ASI concludes that revenue falls by 2% for every 1% increase in the CGT rates.
From the ASI press release:
"Amongst the new evidence considered is the result of CGT rate changes in Ireland and Sweden. The 1997 Budget in Ireland halved the rate of capital gains tax from 40% to 20%. The then Minister for Finance, Charlie McCreevy, was heavily criticized on the grounds that this would reduce revenues. In fact revenues rose considerably, almost trebling and greatly exceeding official predictions… The report also highlights the extent to which revenues from other taxes would be lower as a consequence of the negative effect on economic activity caused by CGT rises. Evidence from Switzerland shows that cantons which eliminated CGT had 3.1% higher growth over those that did not. Since a tax on capital reduces the amount of capital that can be formed and profitably used, the consequent lower levels of output, employment, and consumption would reduce a wide range of tax revenues."
The Express reports the key conclusions: "The Adam Smith Institute says matching CGT to income tax levels would have a huge negative effect, leading to an £880 million fall in revenue from CGT itself plus a drop of another £1.6billion a year in income from other taxes because of how the hike would depress economic activity."
In an editorial The Telegraph warns that higher CGT could be a "defining error" for the Cameron government;
"If the Government insists on bringing CGT rates into line with income tax, it should do so over a lengthy period, with indexation to take inflation into account. Taper relief of the sort suggested by John Redwood, so that people pay less for assets the longer they have held them, must also be part of any reform that claims to be aimed at taxing speculative gains. Gordon Brown's decision, at the outset of the Labour years, to end tax relief enjoyed by pension funds damaged the retirement plans of millions. It is essential that Mr Osborne does not make the same mistake next Tuesday. For many of the Conservative Party's core supporters uncertain about the Coalition's instincts, it will be a defining moment."