John Redwood is fighting to stave off higher CGT rates.
When it comes to bothering Conservative Prime Ministers, John Redwood has previous. Nicknamed the Vulcan on account of his deliberate mannerisms, the Tory MP for Wokingham stood against John Major in 1995, yet only succeeded in making his grey opponent come across as rather warm and jolly in comparison.
Now, 15 years later, Redwood has risen once more from the backbenches, this time to take on the coalition government's plans for a big hike in Capital Gains Tax (CGT).
This Redwood rebellion is more logical, as Spock would say. In opposition the right-leaning MP chaired David Cameron's Policy Review Group on Economic Competitiveness, and he's advised the new chancellor George Osborne. It's easy to believe he reads up on tax law during bank holidays for fun.
And politically speaking, a hike in CGT looks a Lib Dem policy too far for traditional Conservatives, as well as the Tory press.
Several papers have kicked back over in recent days in a surprising showdown over what's too-often labeled a rich man's tax. David Cameron was even forced to defend the mooted changes on the BBC's influential Today radio show.
Murky tax affairs
One difficulty with the CGT debate -- and also why there's still all to play for -- is that we don't actually know what the specific plans are for CGT, and won't until the coalition's first budget on 22 June.
So far we've simply been told the government plans to:
"Seek ways of taxing non-business capital gains at rates similar or close to those applied to income, with generous exemptions for entrepreneurial business activities."
That's widely assumed to mean CGT will be taxed according to your income band, as it was under the last Conservative government. It would entail marginal rates of 20, 40 or 50% compared to today's flat CGT rate of 18%.
Fears have also been stoked by the pledge in the Liberal Democrats election manifesto to reduce the annual CGT exemption from £10,100 a year to just £2,000.
Redwood rides to the rescue
John Redwood proposes a different solution. In an open letter to the new Exchequer Secretary David Gauke MP that he has also published on his blog, Redwood writes:
"I suggest that you tax gains of under one year as income. I would suggest you tax them at 40% for higher rate payers, as I understand the 50% rate is a temporary measure. Were you to use the 50% rate it would need to be clear that you intend to go back to 40% for both Income and Capital Gains as soon as possible."
Redwood points out that charging long-standing property investors or shareholders a 40% rate would be an unfair tax on inflation, given that the old indexation allowance was scrapped when the 18% rate was introduced:
"I therefore suggest that 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%. This should increase the total revenues from CGT by the second year, and offer a stimulus to longer term investment. I would myself go further and offer no capital gains after five years, to send a strong signal to the world's investors that the UK is back in business."
Since Redwood wrote his letter other prominent Tory MPs have come out in support, including the former shadow Home Secretary David Davis. Yet so far the coalition has merely said it's still consulting on the changes, with Liberal Vince Cable even calling Redwood's suggestion 'unworkable'.
Higher rates, lower revenues
Cable protests too much -- Redwood's taper relief system is simpler than the indexation that was in place barely two years ago.
It's also disingenuous for Cable and other supporters of higher CGT rates to claim that they're the only way to stop people converting income into capital gains.
There are plenty of territories in the world with low CGT rates that still somehow manage to collect income tax, and to stop excessive tax shifting by high-fliers (who will find loopholes in any tax regime).
In fact, there are perfectly respectable countries that charge zero CGT -- and not only obscure Caribbean islands or Asian and European microstates. Low or no CGT is payable in the Netherlands and New Zealand, for instance.
Redwood says he appreciates the need to raise more revenue to lift the personal income tax allowance to £10,000 a year. But he argues that raising CGT rates might actually reduce the tax take. He quotes evidence from the US, where annual tax revenues rose from $28.5 billion to $93.3 billion when the CGT rate was reduced to 20% from 24%, only to fall in the late 1980s when the rate was lifted to 28%. A subsequent increase in revenues occurred when the US CGT rate was cut back to 15% in the past decade.
Perhaps the most persuasive piece of number-crunching though comes from The Daily Telegraph's Ian Cowie, who has poured over the Inland Revenue's figures to discover that over half the people who paid CGT in 2008 (the most recent numbers available) did so on gains of less than £25,000. This so-called rich man's tax is clearly also a levy on the middle classes who assume responsibility for their financial wellbeing -- not to mention risking their own hard-earned (and previously taxed) capital in investments with no guarantee of success.
It's a strange feeling to side with John 'The Vulcan' Redwood. But I think the majority of Fools will hope his tax revolt is long-lived and prospers.
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