The calculations from the Adam Smith Institute, a think-tank, emerged as Nick Clegg, the Deputy Prime Minister, signalled that ministers are willing to back down on several aspects of their controversial plans.
The Government has said it wants to increase the rate of Capital Gains Tax (CGT) from 18 per cent towards the rates applied to income, which could see CGT rise towards 40 or even 50 per cent.
CGT is applied to sales of assets including second homes, buy-to-let properties and share portfolios. Some accountants have suggested as many as a million people a year will be caught by increased tax rates when they sell such assets.
Ministers say the CGT rise is needed to help fund income-tax cuts for low earners.
But because asset-holders have a choice about when they sell and incur CGT, some economists argue that increasing CGT rates could reduce the incentive to sell, leading to a fall in economic activity.
Richard Teather, a fellow at the ASI, studied the evidence from other countries that have experimented with increases in CGT rates.He concluded that the total cost to the UK economy of raising CGT to 40 per cent would be between £3.2 billion and £5.2 billion. That would mean a loss of 61,000 jobs, he estimated. “An increase in capital gains tax increases the cost of raising capital for business. Investors expect higher returns and therefore businesses have increased costs and less capital,” Dr Teather said. “This leads to less production and a lower demand for workers, therefore increasing unemployment.”
This is another governmental situation where they need to avoid the law of unintended consequences. June 22nd will see the most interesting budget in a generation.
Author: Chris Slay
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