How Conservative backbenchers won the battle on the Capital Gains Tax rate

The Liberal Democrat manifesto committed that Party to tax capital gains "at the same rate as income".  The Coalition Agreement said that the Government would "seek ways of taxing non-business capital gains at rates similar or close to those applied to income".  Early reports suggested that the Coalition would bring CGT into line with the top rate of tax at 50 per cent.

This morning, Conservative backbenchers are claiming victory, in the aftermath of the rate being set at in yesterday's budget at 28 per cent.  Yesterday afternoon in the Commons, as George Osborne announced the news, one leading right-winger turned to his equally prominent neighbour.  "I reckon that'll do," he said.  For the moment at least, the revolt over CGT seems to be over.

Waged in newspaper columns, private meetings with the Chancellor, blog entries, questions to the Prime Minister and think-tank reports, the struggle over taxing capital gains may be a pointer to the future.  It  made visible the tensions between the Party's front and back benches over strategy, policy, and the future of the Coalition itself.  There've been five key players in the attempted pre-emptive strike against a CGT rise -

First, Michael Forsyth.  The word "Thatcherite" might almost have been coined to describe Forsyth.  Tough, bright and fervent, Lord Forsyth of Drumlean was drafted in by George Osborne during his early days as Shadow Chancellor to head up a Tax Commission - when the first George Osborne was in place.

It's a decision that the second, third and fourth George Osborne may have regretted.  Forsyth produced a radical, tax-slashing report; one of its main themes was that lower taxes bring higher revenue.  He was the first senior Tory to sound off against a CGT rise - in the Daily Mail on 17th May.

His report didn't oppose taxing capital gains.  Rather, it said that "the current regime should be replaced with a tax on short-term capital gains only".  An alarmed Forsyth raised his CGT concerns at a No Turning Back Group dinner the evening after his Mail remarks were published - and others were quick to pile in.

Second, John Redwood.  Redwood is one of the few politicians both to grasp that blogs are important and to write one that's readable.  On May 18, he wrote that "last night, a group of MPs and peers worked into the night on how we might come up with a solution to the political problem facing the Coalition".

This was a reference to the NTB dinner.  Headlined "Tax cuts and Robin Hood", it warned against soaking "business, enterprise and investment".  One of its key features was the suggestion of a taper, operating at lower rates than a similar one in the Forsyth report.  This, Redwood wrote, would help to raise revenue.

On June 10, he took on the Institute for Fiscal Studies, which opposes taper relief, arguing that the IFS's own figures prove that it brings higher revenues.  The IFS's intervention was intriguing.  Redwood pointedly remarked that part of the taxpayer-subsidised IFS's brief is "to avoid party political argument".

Third, David Davis.  Some would claim that Davis' golden period was as Shadow Home Secretary.  Others, more controversially, maintain that his civil liberties by-election was his finest hour.  But his forte, arguably, is running backbench campaigns - such as his successful push during the 1980s to scrap the Dock Labour Scheme.

Although Davis was at the May NTB dinner, he wasn't as quick off the mark as either Forsyth or Redwood.  As a recent former leadership contender, however, his views make more waves.  The Mail, again, provided the platform.  On May 28, he warned that raising CGT "is unfair" and "won't work".

Davis repeated Forsyth and Redwood's arguments about lower taxes yielding higher revenues, the necessity of a taper.  But he stressed a belief that he holds very strongly - namely, that a CGT would hit the elderly, penalising saving, deterring thrift, and damaging social mobility.

Fourth, the "Tory press" - the Daily Mail and Daily Telegraph.  Tim wrote earlier this week about the relationship between the Mail and the Conservative Party.  We've already seen how the Mail found Michael Forsyth and hosted David Davis.  It began campaigning against a CGT rise before the NTB dinner.

The Daily Telegraph has fought head-to-head with the Mail to own the CGT issue.  It gave Michael Forsyth a comment piece on 19th May and flagged the issue in the aftermath of the Coalition Agreement.  Downing Street will be watching both papers very closely on the issue.

Fifth, the Adam Smith Institute.  Take a bow, Madsen Pirie.  Dr Pirie's comment piece in the Mail of May 17 - the day that its Tim Shipman reported Forsyth's remarks - was the first out of the traps.  Pirie described the planned CGT rise as "disgraceful", arguing that if effected Conservative support could "ebb away rapidly".

The ASI did a lot of leg-work on the figures relating to lower taxes and higher yields.  Redwood referred to them in his blog on 25th May, and you can read the ASI's original report here, a large part of which seems to have been written by Peter Young, and which looks at CGT rates at home and abroad.

Three final points:

• To date, there's been no single anti-CGT campaign.  Although Forsyth, Redwood and Davis are members of the same dining club, they operate separately.  Campaigning may now become more focused.  It should be noted that Graham Brady, the 1922 Committee Chairman elected in the teeth of opposition from David Cameron, raised the issue at Prime Minister's Questions last week

• David Gauke and Greg Hands have listened attentively to the views of those opposing a rise.  Hands, Osborne's energetic PPS, tried to ensure that those troubled by the prospective CGT rise - a considerable number - have had the chance to see Osborne in person.  Gauke is a calm presence, and it's interesting that Redwood's letter to the Treasury here was addressed to him, not Osborne.

• George Osborne's view has been primarily shaped by politics rather than economics.  "George is quite tactical," one senior Tory told me, looking back on the CGT story last weekend.  "He's a very political person," another said a day later.  The same phrases come back again and again - a reminder that Osborne, as ever, has put politics before economics, trying at once to keep his coalition partners and his backbenchers on board.

It can be argued that the concerned backbenchers lost on CGT.  Forsyth, Redwood and Davis wanted a taper.  Cable opposed one.  He won on the point: there's no taper.  None the less, Vince Cable and his Party clearly didn't win either, since they wanted a 50 per cent rate.  They lost on the point: at 28 per cent, the rate is almost half of what they wanted.

However, the main backbench players seem contented enough.  Michael Forsyth told me that "this is the first time I can remember that the Treasury has conceded that higher rates could bring lower revenue" - referring to Osborne's explanation of why he hadn't set a higher rate.  Redwood's blog gives the announcement a cautious welcome.  Friends of Davis point to the unchanged CGT rate for lower rate taxpayers.

If the rate doesn't change in the immediate future, it'll be well worth looking in the future to see whether yesterday's changes raise or lower revenues.  As I wrote, there's a Conservative precedent for a CGT rise: Lawson raised it in 1988.  But he also lowered the top income tax rate.  There was nothing on that matter in the Budget at all.

Paul Goodman