The candidates in the Conservative Party leadership election appear to be obsessed about things like leaving the European Convention on Human Rights or criticising the Equality Act, which protects from discrimination. As one political commentator put it, the Tory leadership hopefuls want to prove how ‘anti-woke’ they are (Big Issue, 4 September).
What is absent from the Conservative debate is a serious discussion about the main challenge we are facing, which is the terrible state of our infrastructures and public services that they have left behind.
Taxes
During the recent general election campaign, the Conservatives were criticised by the Institute for Fiscal Studies for not having realistic tax plans.
Taxes will have to rise, but which taxes? Labour has boxed itself in, with its promise not to increase income tax, national insurance, VAT or corporation tax.
According to The Times (Here comes the tax grab, 31 August), capital gains tax is likely to increase whilst inheritance tax and pension tax relief may also be affected. Is this the best or fairest way to increase taxes?
At first glance, it may seem fair to increase the capital gain tax rates (currently 24% or less) as they are lower than the rates paid by higher or additional income taxpayers (40-45%).
However, income is genuine new money, hence it is taxed at high rates. Conversely, “capital gain”, is frequently not a gain at all: it is just an adjustment in values that reflects inflation.
Thus, an investor who bought a flat in 2010 in order to rent it, could have paid £200,000 for the purchase and might have subsequently sold it in 2024 at £ 370,000, thus realising a £ 170,000 taxable capital gain. However much of that “capital gain” is just an adjustment for inflation as an asset worth £200,000 in 2010 would now need to be worth £ 347,000 just to compensate for inflation (RPI index).
Capital gains tax
Capital gains tax has been through multiple iterations. There was a time when the capital gain due to inflation was not taxable. More recently the full “capital gain” has been subject to tax, but at least the lower tax rate and a £ 12,300 yearly allowance (the amount that can be gained without paying tax) compensated for this.
Now that the capital gain allowance has been reduced to £ 3,000, an increase in the capital gain tax rate could have a real impact, unless the inflation discount was reintroduced.
An increase in the capital gains tax would otherwise affect the already declining number of properties on the rental market and could result in higher rents.
An increase in inheritance tax would also have consequences. The current tax rate (40%) is higher than the rate in many other countries and the tax threshold, above which this tax is applied, has not been increased since 2009 despite an 84.4% Inflation (RPI) over this period.
Inheritance tax is not progressive as the super-rich have many more options to avoid paying it, so that the average effective tax rate declines with wealth and is just 10% for estates above £10 million: an increase in the inheritance tax threshold would reduce this imbalance.
Raising inheritance or capital gains taxes is likely to increase the number of wealthy individuals migrating to lower taxation countries.
The relationship between tax rates and tax revenues is complicated and Arthur Laffer popularised the concept that tax increases beyond a certain point may actually reduce tax revenues.
Alternative solutions
When it comes to taxing the rich increasing the top rate of income tax from 45% to 50% (it was 50% until 2013) may be a better option than increasing capital gains or inheritance taxes.
Sweden has more billionaire tax residents (in relation to the population size) than either the US or the UK, despite a high top rate of income tax (above 50%). This is probably because there is no inheritance tax and capital taxation is low.
To limit tax increases we need to expand the economy. James Ball (New European, 5 September) has suggested that rejoining the EU single market would generate enough growth and extra tax revenues to plug most of the £22bn black hole in the public finances that Labour has inherited from the Tories.
