Raising capital gains tax ‘could cut the country’s income by £2.5bn a year’

CAPITAL gains tax hikes being ­considered by ministers could slash Government income by nearly £2.5 billion instead of raising extra cash, experts warn today.

CGT warning from Dr Eamonn Butler CGT warning from Dr Eamonn Butler

The assessment by free market think-tank the Adam Smith Institute adds to pressure on the coalition ahead of Tuesday’s Budget which is expected to announce CGT increases.

The coalition is committed to “seeking ways of taxing non-business ­capital gains at rates similar or close to those applied to income, with generous exemptions for entrepreneurial ­activities”. The proceeds will help fund higher income tax thresholds.

The Lib Dems previously argued for a rise from 18 per cent to as high as 40 or even 50 per cent to stop people dodging tax by converting income to capital. But the coalition has hinted at concessions to savers as well as ­entrepreneurs.

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.

That potential £2.48 billion loss is equivalent to cutting 30,000 public sector jobs. Other countries’ experience suggested that every one per cent CGT rise led to a two per cent drop in revenues, it says. But reductions had triggered higher revenue and economic growth. It also warns ministers against putting their hopes in targeting assets held short-term to catch tax dodgers. Only about five per cent of CGT receipts come from such holdings, it said.

Institute director Dr Eamonn ­Butler said: “When we have a dangerously large deficit, politicians must take ­special care that fiscal policy ­measures are adopted on economic rather than political grounds, otherwise the deficit will worsen as a result of lower growth and reduced revenues – the opposite of what is intended.” Chancellor George Osborne also got a fresh warning over the VAT hike he is expected to unveil. The Institute for Public Policy Research (IPPR), dubbed Labour’s favourite think-tank, urged Mr Osborne to raise income tax rates by 3p to where they were before Labour took power in 1997. It said that a phased income tax rise rather than a VAT hike was the fairest approach.

Last night pressure on Mr Osborne rose when more than 110 leading entrepreneurs warned any blanket rise in CGT would have a detrimental effect on entrepreneurial activity. They are writing jointly to every Tory and Lib Dem MP. Rob Lewis, of Omnifone, said: “We fear a unilateral blanket increase in CGT, which would mean start-ups, talent, investment, jobs and tax revenues will head elsewhere over the coming years.”

The letter urges Mr Osborne to ­consider zero-rating CGT for ­“genuine” equity investments or start-up ­incentive schemes provided assets and options have been held for a ­significant time.

It says: “Such a policy would help the UK become the natural home for innovative entrepreneurial start-ups and create new jobs.”

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