"I have long felt it is highly undesirable that Capital Gains Tax should have given rise to a substantial tax avoidance industry dedicated solely to converting income into capital gain, which is taxed very much more lightly."
No: not the words yesterday of David Laws. Or even of George Osborne. Rather, I'm quoting from Nigel Lawson's magisterial memoirs, "The view from Number Eleven", on the 1987 budget. I've changed the tense from past to present, but otherwise altered nothing.
That year, Lawson "decided...to tax corporate capital gains at the relevant corporation tax rate, which at that time meant 35 per cent for larger companies and 27 per cent for smaller companies...instead of at the long-standing Capital Gains Tax rate of 30 per cent."
"It was an astonishing stroke of luck that no-one guessed that I envisaged this merely as the first stage in a two stage process, with the principle being extended to individuals in a subsequent Budget. It thus came as a complete surprise in the 1988 Budget when I brought Capital Gains Tax for individuals into line with the basic and higher rates of income tax."
Later in his memoir, Lawson names the rates: 25 per cent and 40 per cent respectively. He adds: "Not surprisingly, this change was, and remains, very unpopular with many Conservative back-benchers, who saw it as an increase in the Capital Gains Rate from 30 per cent to 40 per cent - although they were in no position to complain too loudly in a year in which the higher rates had been significantly reduced."
Obviously, Lawson's CGT rises aren't the beginning and end of the matter as far as Conservatives are concerned. He wasn't Margaret Thatcher's last Chancellor, and John Major's Government followed hers. TaxCafe claims here that "by the time of the 1997 General Election, the Conservatives were set well on a path towards the abolition of Capital Gains Tax". And like many other taxes, CGT has long been subject to a complex series of special reliefs and allowances.
None the less, Lawson's words indicate that there is a Conservative history of raising CGT in order to clamp down on tax avoidance. He was a controversial Chancellor, not least because of his support for entry to the Exchange Rate Mechanism - a cataclysmic blunder. None the less, he was a great tax reformer, and deliverer of "flatter, lower, simpler taxes" (copyright: George Osborne).
I'm against tax rises and for tax cuts whenever possible - money should, as Gladstone put it, "fructify in the pockets of the people". But some tax rises will be necessary to help reduce the deficit, as Osborne indicated during the election campaign. That being so, CGT increases have a respectable Conservative pedigree, and there's no reason in principle why they shouldn't be part of the mix.
However, I've three reservations -
* The Liberal Democrat manifesto committed that Party to "taxing capital gains at the same rate as income". Our own made no specific reference to the tax. The agreement between the two parties referred to "a detailed agreement on taxing non-business capital gains at rates similar or close to those applied to income, with generous exemptions for entrepreneurial business activities". Questions about accountability are bound to arise from agreements and/or measures that weren't put before voters in an election manifesto.
* The agreement refers specifically to non-business capital gains and to exemptions for entrepreneurial business activities. This raises specific questions about what constitutes such gains and activities - as well as broader ones about how any further reliefs and exemptions might be structured. John Redwood has some suggestions here.
* Finally, look again at one of those quotes from Lawson in relation to the 1988 budget: "I brought Capital Gains Tax for individuals into line with the basic and higher rates of income tax." It was that budget, of course, which slashed the higher rate from 60 per cent to 40 per cent (prompting "grave disorder" in the Chamber from Labour MPs, and the suspension of the Commons for ten minutes).
In the medium term, then, Osborne should remember the other half of Lawson's equation. If CGT rates are to go up then, the top rate should come down - as soon as possible. After all, our manifesto said that "we do not regard the 50p tax rate as a permanent feature of the tax system". I've written about this matter before here.
Paul Goodman
