Why not raise CGT?

The Labour party is more influenced by the Tory press than by economic rationality. That's the inference to draw from Rachel Reeves saying she has no plans to raise capital gains tax.

I say this because there is a widely-accepted economic logic for doing so. It is that income and capital gains are much the same: what should matter on any investment is the total return, not the form in which that return comes. Taxing capital gains at a lower rate than income therefore distorts individual behaviour. For assets held outside of tax shelters, this pushes investment towards shares that don't pay dividends - which are often spivvy Aim stocks - and away from dividend-paying ones. It encourages investors to sell some shares merely to realize a capital loss and to hold others to avoid a capital gains tax bill. It encourages people to take their returns as capital gains rather than as income, which often entails the deadweight costs of keeping armies of lawyers and accountants looking for tax fiddles. And it favours financial capital over human capital.

In all these ways, having a lower CGT than income tax rate is iniquitous and inefficient. This argument is separate from the question of whether or not we should tax the rich more.

Sensible economists have long appreciated this. "Capital gains need to be taxed at the same rate as other components of income" said the Mirrlees Review (pdf) in 2011. And back in 1988, Nigel Lawson said:

In principle, there is little economic difference between income and capital gains, and many people effectively have the option of choosing to a significant extent which to receive. And in so far as there is a difference, it is by no means clear why one should be taxed more heavily than the other. Taxing them at different rates distorts investment decisions and inevitably creates a major tax avoidance industry.

Why, then, is Reeves so loath to raise CGT? Doing so feeds into the impression that Labour lacks not just ideas, but any basis in serious thought.

The answer, I think, is simple. The Labour leadership is terrified of the headlines that would accompany even rational tax reforms: "tax raid on millions", "attack on business" and so on. As I've said, what matters in politics is not intellect, but power. Intellectually, there's a case for equalizing CGT and income tax rates. But intellect loses to power.

A sensible Labour party could however use the media to its own advantage here, at least once it is in office: it is always easier to get forgiveness than permission.

Another media attack upon Labour is that of fiscal profligacy: "where will the money come from?" Labour could answer this question by using CGT simply as a revenue-raiser.

Strictly speaking, of course, this makes little sense, and not just because the rise wouldn't raise very much. What a Labour government will need is not money but real resources: nurses, care-workers, builders, skilled management and so on. Raising CGT would tax cash that would largely be saved rather than spent, and so would do little to release these resources.

But we don't live in a polity in which good arguments prevail, not least because years of intellectual pollution from the media have replaced them with mindless drivel. The media would therefore have no right to complain if Labour were to raise CGT merely to "raise revenue". If you make bombs you don't win any sympathy if one goes off in your face.

Comments

[LJC]

Does anyone remember "Labour's Tax Bombshell" from the 1992 General Election, with the Germanic-looking man painting the figures on to a black-painted 'bomb'?

[TickyW]

I agree that capital gains tax should be higher but I disagree "that income and capital gains are much the same"

Capital gains are realised holding gains that arise solely from selling an asset that has fortuitously risen in value over the period of its holding. The income from a holding gain may sometimes have arisen from "skill", but it's a spiv skill that makes no contribution to the commonwealth. The holder of the asset has made no contribution to the holding gain in terms of their labour power. So for me there is a material difference between income derived from labour and income derived from holding an asset. Is not title to economic benefits strongest when those benefits have been earned through the sweat and effort of individual labour? I believe that is what Nozick argues, though I may be wrong.

In the case of capital gains tax being equalised to the tax rate on labour income then the percentage rate of CGT should be 32% for basic rate tax payers (to account for National Insurance Contributions charged on labour income at 12%). I'm all for that! The rate will be higher for higher and additional rate tax payers

[Jim]

"Capital gains are realised holding gains that arise solely from selling an asset that has fortuitously risen in value over the period of its holding. The income from a holding gain may sometimes have arisen from "skill", but it's a spiv skill that makes no contribution to the commonwealth. The holder of the asset has made no contribution to the holding gain in terms of their labour power."

So if you build a business from nothing, 'you didn't build that' right?

[rsm]

What is the likelihood of provoking the election of more Reagans, Thatchers, Bushes, and Trumps because voters don't like to pay taxes themselves and morally apply Kant's categorical imperative?

[TickyW]

@Jim, I believe that under the specific set of circumstances you mention, Entrepreneurs' Relief (now renamed) can be claimed. This reduces the capital gains tax charge, presumably to recognise the labour element in a capital gain.

Building a customer base from nothing does require labour power and will form a component of the capital gain when a business built from nothing is sold as a going concern. However, the balance of the capital gain is likely to be due to holding gains, some of which is likely to be location and the profitable footfall it produces.

[ltr]

The Labour party is more influenced by the Tory press than by economic rationality....

[ That is the leadership of Labour, which is still trying to destroy Jeremy Corbyn and in so doing destroy traditional Labour working-class support.

Labour leadership is intent on being Tory. I am appalled. ]

[Blissex]

«In all these ways, having a lower CGT than income tax rate is iniquitous and inefficient.»

I guess that many millions of voters who make a lot of money from property and have conspicuous retirement accounts have a different opinion...

«This argument is separate from the question of whether or not we should tax the rich more.»

That's in practice a rather fatuous point: (most of) the rich are rich because they have lots of capital and earn income from capital, not because they have huge incomes from work, it is not simply that they rearrange their affairs that way to pay the lower tax rate on capital. In other words the tax rate on capital is lower because they benefit from it directly, not just a ruse to create a tax loophole for them.

[Blissex]

«So if you build a business from nothing, 'you didn't build that' right?»

Does that mean that if someone builds a lot of savings from nothing settings aside their income from work their income should have a tax rate as low as capital gains?

Then that become only taxing consumption at a "regular" rate, that is the low income poor who have neither capital in come not a work income high enough that they can save part of it.

Perfect thatcherism! Rah! Rah!

[ltr]

I guess that many millions of voters who make a lot of money from property and have conspicuous retirement accounts have a different opinion...

[ Fine, but the UK is sorely in need of infrastructure investment which will allow for needed increases in productivity. Absent increased investment, growth in the UK is falter indefinitely. ]

[rsm]

What if large language models can figure out the arbitrary grammar of asset prices to predict tomorrow's market today, given the same context-awareness that allows LLMs to figure out arbitrary natural language grammars?

Do you think hedge funds are doing it yet?

[Blissex]

«But the UK is sorely in need of infrastructure investment»

The "UK" is an abstract label for something that does not have an income, pay taxes, consume goods, vote, or need anything.
What the "UK" wants or needs in someone's thoughts is politically irrelevant.

«which will allow for needed increases in productivity. Absent increased investment, growth in the UK is falter indefinitely.»

My usual point is that 20-40% of voters have enjoyed booming living standards for 40 years, they cannot imagine why they should pay more taxes to increase investment even more, when fantastic sums have already been invested in property over those 40 years, because (southern) property is the most productive capital ever, with a net ROI of 50%-70% compound per year.

I'll try to translate the politically meaningless statement about the "UK" into a politically meaningful one:

"To increase the capital/worker ratio and thus both increase production per worked hour and make labour more relatively expensive than capital, the UK government should increase taxes and encourage the switch of private investment away from property towards physically productive uses, cratering house prices".

That's why I wrote that "I guess that many millions of voters who make a lot of money from property and have conspicuous retirement accounts have a different opinion...".

For those millions of voters that is COMMUNISM! and only a "genocidal racist trot stalinist" like Corbyn could have ever proposed to discriminate and persecute them by planning to impose the horrors of COMMUNISM! on them.

[Blissex]

«To increase the capital/worker ratio and thus both increase production per worked hour and make labour more relatively expensive than capital»

Big business, finance and property rentiers are very well aware that when capital becomes more locally abundant relative to labour, as for example as during the Black Death, then wages rise and profits shrink, and that in particular large concentrations of productive capital make unionism easier and strikes more effective.

It may be a coincidence that UK big business, finance and property rentiers have for 40 years favoured policies to invest massive amounts to offshore large amounts of productive capital to states where unionism is illegal or "discouraged", and have favoured widely dispersed low capital intensity activities like services, plus large immigration of "anti-inflationary" workers from low-wage locales.

Ivan Rogers, "Prospect", November 25, 2017:
«King pressed the case to open the labour market without transition on the grounds that it would help lower wage growth and inflation, address supply bottlenecks in a fast-growing pre-financial crisis economy, and help keep interest rates low [...] But this was an immigration and free movement policy driven by the desire to fuel U.K. growth, and by the belief that we were stealing a march on EU competitors and further consolidating the advantages of the U.K. model over that of a sclerotic Germany, which we were all characterising still in 2004 as the decade-long sick man of Europe.»

[Jim]

"Does that mean that if someone builds a lot of savings from nothing settings aside their income from work their income should have a tax rate as low as capital gains?"

Absolutely! I'd be entirely in favour of only taxing interest income at 20% regardless of how high it is, just like capital gains. Encourage people to save and invest not spend.

[ltr]

«But the UK is sorely in need of infrastructure investment»

The "UK" is an abstract label for something that does not have an income, pay taxes, consume goods, vote, or need anything.

What the "UK" wants or needs in someone's thoughts is politically irrelevant.

[ Yes, this is well argued and I have no ready response other than the absence of shared responsibility in a country seems likely to lead to a collective deterioration in living standards. This however is not a time when the British are being encouraged to think collectively, which is why Labour leadership had to ruin Jeremy Corbyn. ]

[Blissex]

«the absence of shared responsibility in a country seems likely to lead to a collective deterioration in living standards»

Admittedly my argument was a bit oversold for effect, to make clear that millions of voters are narrowly focused on their short term benefits.

It was oversold because politics is not solely a fight over irreconcilable interests, but there are also shared interests as you imply. There are however three main problems even with them:

* Politics over shared interests means deciding the best policies, and there can be quite large differences of opinion as to those, even among people of the best disposition and high competence.

* What different factions regard as shared interests might be quite different.

* Some factions, such as the thatcherites, have been working hard for a long time to minimize shared interests, for example with policies tending to segregate voters geographically by income and wealth.

[Blissex]

«This however is not a time when the British are being encouraged to think collectively»

But so many do! I have the strong impression that property owners lobby hard and collectively about their shared interests, and so do business owners, and finance people seem very keen to fight for their collective interests too. Not so much for workers and the generic notion of "british" though.

The questions often is how wide is the category "our own" who should "think collectively".

[Blissex]

«millions of voters are narrowly focused on their short term benefits.»

Commenter on "The Guardian":
“I will put it bluntly I don't want to see my home lose £100 000 in value just so someone else can afford to have a home and neither will most other people if they are honest with themselves”

A conversation in June 2016 between daughter and her father:
“Friend: How did you vote then, Dad?
Dad: I voted Out.
Friend: Dad! Why did you do that? The economy will crash! It’ll cause chaos!
Dad: That won’t bother me hen, I’m retired.
Friend: But it’ll affect me! What about me?
Dad: (Long silence).”

https://www.eschatonblog.com/2015/04/why-didnt-i-get-rich.html
“journalists/columnists of a certain age (meaning ones not much older than me and younger) are coming around to the realization that the economy is screwing them, too. There was a moment when a lot of them (we’re talking ones at elite outlets, not your random small town paper) thought they’d done everything right, would become celebrities, and get Tom Friedman’s speaking fees. The economy sure was working for them, and screw everybody else.”

[Blissex]

«The questions often is how wide is the category "our own" who should "think collectively"»

A mental exercise I often do when reading "high-minded" wikehamist arguments is to extend them to Chad or Moldova. Consider for example:

"Chad is sorely in need of infrastructure investment which will allow for needed increases in productivity."

Should then the *UK* government raise taxes and borrowing to invest in infrastructure in Chad? If the UK government don't do that then:

"Absent increased investment, growth in Chad is falter indefinitely."

Are the chadians "our own" to the UK government and their voters and sponsors? Why should those voters and sponsors care about the chadians?
Now substitute "Chad" with "Tyneside" or "lazy, uppity, overpaid english workers".

One point here is that there is a common weal, the UK state and its budget, between those voters and sponsors and the Tynesiders, unlike with the chadians, but the question many of those voters and sponsors ask is whether that should be the case to a significant extent.

One of the fundamental categories of english life is the difference between masters and servants, and I doubt very much that in UK the masters think that they should have a common weal with the servants, as those servants are to them as the chadians are (and to the servants too).

[Guano]

Rachel Reeves has, in recent months, been going round northern England saying "Isn't it good that European Freedom of Movement has ended?". There is no evidence that FoM had negative effects and it has ended because of Hard Brexit. Reeves would appear to be a Hard Brexiteer.

Given the effects of a Hard Brexit on business, I don't see why anyone in the business community should take her seriously.

Guano

[TickyW]

I stand corrected. I had presumed that CGT receipts came mainly from the sale of chattels by individuals. This excellent article points out that CGT receipts come mainly from the sale of small businesses. I did not know that.

Currently, it appears that an individual selling a great work of art, and who thereby realises a holding gain, comes under the same tax regime as an individual selling a small business whose assets have come into existence through the efforts of the same individual, save that the latter individual may qualify for Entrepreneurs' Relief (now renamed).

https://www.theguardian.com/uk-news/2021/oct/26/why-capital-gains-tax-reform-should-be-top-of-rishi-sunak-list-budget

[aragon]

You may recognise this one!

Are humans smarter than Yeast?

Yeast expands until it exhausts their food supply, and then colony collapses.

So again are Humans smarter than Yeast?

Given the current Earth population possibly...

If you have a host (the UK or the West), with a parasite, and you progressively strengthen the parasite, and weaken the host what happens to the parasite, when the host collapses?

We sink or swim together.

Make me King of the World, it worked for Boris!

[aragon]

https://www.theguardian.com/books/2023/apr/03/the-big-idea-will-fusion-power-save-us-from-the-climate-crisis

"Today the allure of fusion energy lies not so much in its price as its almost negligible carbon emissions, and therefore its potential to save us from the ravages of global heating. But will it arrive in time to stop the planet frying?"

https://en.wikipedia.org/wiki/Wright_Brothers#First_powered_flight

"The first flight, by Orville at 10:35 am, of 120 feet (37 m) in 12 seconds, at a speed of only 6.8 miles per hour (10.9 km/h) over the ground"

No future in this flying thing, stick with walking or space hoppers!

We have fusion and given we have the prospect of fission the minor disadvantages of Nuclear Waste etc, can be lived with for the next few generations.

Not to mention adaption, and/or Geo-engineering.

No hit the big red panic button. And go back to the stone age!

[aragon]

Switch Fission and Fusion in the above post.

Guess where that expensive tritium comes from (we don't need much for pump priming) - one source is the waste pools of Nuclear Waste, oh the irony...

[aragon]

https://www.telegraph.co.uk/news/2023/04/03/the-ai-disaster-is-already-here-and-we-dont-care/

"But then I’m a real conservative, and wellbeing is more important to me than economic advantage."

Did he type that with a straight face?

GPT-4 et al are dumb as a box of frogs, are A.I better than Google for searching stack-overflow? Yes. Will it make a difference - Yes

Is their intelligent life in Westminster Palace?

No, the yeast have it!

Can Chadian's join the Jarrow March?
https://en.wikipedia.org/wiki/Jarrow_March

There is only one documented case of walking on water.

Wasn't that fun...

[aragon]

"Parents have sympathetic reasons for letting their kids go online. “I won’t hear the end of it.” “I don’t want them to be left behind.” “If I supervise it, I can protect them.” But it all amounts to “there is no alternative”, which isn’t strictly speaking true because parents could say no to their children and the Government could support them by hitting pause on AI. What are ministers frightened of? Machines haven’t got the vote. Yet."

But there is an simple alternative, it's just evidently beyond the yeast in charge of the Online Safety Bill, and they won't consult anyone with a I.Q. greater than their shoe size."

Box of frogs it tell you - just ask any LLM (Large Language Model).

I'm stopping now ... the Irony is too much...

[Coprolite]

The rate differential warps investment decisions and returns on individuals' different endowments of capital and labour.

People who have only labour to sell need to be able to produce something like 30-40% more per £1 spent on their labour than people selling capital assets to match the same return on investment. (no one's mentioned employers'NI).

People who start with lots of capital can sell it for a lightly taxed profit.

This may have made sense when we were capital constrained as an economy 75 years ago. But we now have listed companies sitting on so much cash they buy their own shares back and a squeeze on labour supply.

[Blissex]

«Yeast expands until it exhausts their food supply, and then colony collapses.»

That's the optimistic version where you don't consider the excrete. To consider them the model needs to have both an integral and a differential part.

Anyhow for fans of "The Matrix" that's how Agent Smith describes humanity, as an endlessly self-replicating virus, and when he merges with Neo he becomes one himself.

«Is their intelligent life in Westminster Palace?
No, the yeast have it!»

From the point of view of their living standards and their time horizon the thatcherite MPs and their "sponsors" and voters have been very cunning and have been winning big time for 40 years and, as the BoE balance sheet testifies, they can keep winning for quite a bit longer. Is that cunning, which the yeast don't seem to have, "intelligence"?

[Blissex]

«This may have made sense when we were capital constrained as an economy 75 years ago.»

Nah, not even then; tax is not a morality tale, or an incentive or disincentive policy, it is just a way to spread disinflation as widely (and as little) as possible in a way that is difficult to evade or avoid as possible.

Anyhow that "75 years ago" makes me think of JM Keynes "euthanasia of the rentier" and other wistful thinking from "Economic possibilities for our grandchildren", and he was a hardcore "whig", not even a social-democrat, never mind a socialist:

http://www.econ.yale.edu/smith/econ116a/keynes1.pdf

[aragon]

How many more banking crisis will it take?

UBS, Deutsche Bank...

https://www.theguardian.com/business/2023/apr/04/liz-truss-pension-episode-flags-risk-of-further-financial-crises-says-imf

"The report said stress tended to emerge when NBFIs borrowed money to finance investments or boost returns through the use of financial instruments such as derivatives, and when an institution was unable to generate enough cash through the sale of assets to satisfy redemption requests by investors. The connections between NBFIs and traditional banks amplified problems at times of stress."

And don't look at the Balance of payments. It too used to be a political issue, no longer mentioned.

Fortunately Crypto has not been integrated into the Banking Sector.

A run on the pound...

https://www.theatlantic.com/international/archive/2022/01/will-britain-survive/621095/

"Britain, this person said, was failing because it had grown lazy and complacent, unable to act with speed and purpose. The state had stopped paying attention to the basics of government, whether that was the development of its economy, the protection of its borders, or the defense of the realm. Instead, it had become guilty of a failed elite groupthink that had allowed separatism to flourish, wealth to concentrate in London and its surrounding areas, and the political elite to ignore the public mood."

[Blissex]

«“wealth to concentrate in London and its surrounding areas, and the political elite to ignore the public mood.”»

What's wrong with that? As long as the people who matter, that is the affluent middle class and rich upper class in “in London and its surrounding areas”, are doing splendid, and they are, what's the issue?

If the people who don't matter, the servant classes euphemistically referred to as “the public mood” are unhappy with not mattering, they should realize that to matter is a question of power, as our blogger kept telling us in the post above, not of merely whining that “Britain, this person said, was failing” for them.

[aragon]

https://www.theguardian.com/commentisfree/2023/apr/05/decline-of-the-west-causes-moral-decay-living-standards

"And yet how little this halt in human progress is mentioned, let alone debated. With our civilisation facing multiplying existential challenges, how quickly stagnation and decline could become a freefall. You don’t need an overactive imagination to ponder the brutal possible consequences, especially if progressive politicians fail to offer compelling answers. Our lives are shortening, our wellbeing is falling, our security being dismantled. These are the conditions of despair, and a bitter harvest beckons."

[ltr]

People who have only labour to sell need to be able to produce something like 30-40% more per £1 spent on their labour than people selling capital assets to match the same return on investment....

[ Interestingly and nicely expressed. ]

[Blissex]

Posted by: aragon | April 05, 2023 at 12:09 PM
«"Our lives are shortening, our wellbeing is falling, our security being dismantled. These are the conditions of despair"»

But again, around 30% of voters are enjoying longer lives, rising well-being, improved security, thanks to a generous and activist government that delivers prosperity to them, redistributed from the lower classes.

The people who write hallucinations like "Our lives are shortening, our wellbeing is falling, our security being dismantled" as if these applied to everybody are trying to make propaganda of the “We are all in the same boat” sort as David Cameron so cunningly said to fool the proles.

Or at best they cannot realize that 14m people vote Conservative, and some million more LibDem and New New Labour, because they are well satisfied with their rising fortunes, not because they are grateful to the governments of the past 40 years for testing their mettle with character-building adversity.

[rsm]

"around 30% of voters are enjoying longer lives, rising well-being, improved security, thanks to a generous and activist government that delivers prosperity to them, redistributed from the lower classes."

So why is growth better than living in equilibrium with nature, for me (assuming I'm not in the 30%)?

Also, did the lower classes ever have the money that has been "redistributed" away from them, or does new money mostly account for wealth inequality? If 70% realized that the rich are getting rich from money creation through finance, why can't we use the same trick to give us each a strong basic income?

[aragon]

Because the Ponzi scheme cannot go on forever, it's already lasted my adult lifetime.

Eventually the TSWHTF.

Britain is already dropping out of the club of rich countries (along with Italy) and the poor in Slovakia are in a better position than the same bottom 10% in the U.K.

The wealthy keep shrinking adding more and more to the newly impoverished.

Gentle decline is not guaranteed, how many more Minsky moments, how many banking rescues can we endure?

Would a collapse of UBS take the Swiss Government with it?

And if we go off a cliff no-one will have a parachute.

The final collapse could be sudden and rapid.

Blithely carrying on in the hope something will turn up is a poor strategy.

Indeed a ship of fools.

https://en.wikipedia.org/wiki/Ship_of_fools

[ltr]

The people who write hallucinations like "Our lives are shortening, our wellbeing is falling, our security being dismantled" as if these applied to everybody are trying to make propaganda of the “We are all in the same boat” sort as David Cameron so cunningly said to fool the proles....

[ Nicely argued. The need is for traditional Labour supporters to turn to a traditional leader again, but fear of that was why Jeremy Corbyn needed to be ruined by Starmer and Blair and the like.

What should be telling is that Macron is presiding over closer economic relations with China but British leaders are under no such pressure and are too blind to understand how important that would be economically. ]

[ltr]

Just as there will be tens of billions of euros of Chinese trade with France as a result of the Macron-Xi agreements, so the Chinese would dramatically increase trade with the UK and spur British growth. Britain needs growth, no matter what wealthy property owners might supposedly think.

So, look to growth where growth is assured.

[aragon]

This was published at the end of 2022 (30th Dec)

https://adamtooze.substack.com/p/chartbook-184-nostalgia-for-decline

"Today, the UK’s problems are not those of Italy. The two economies are quite different. But, in both Italy and the UK, what we need to account for is not just slow growth, but growth interrupted. What both the UK and Italy are experiencing in the early decades of the 21st century, is something different, not growth-underperformance, so much as sustained stagnation, literal decline and repeated failure to recover adequately from severe shocks."

"The extent of Britain’s decoupling from the economic development of other rich countries is well captured by data for median household income per person - a good measure of “average” living standards."

[Blissex]

«Because the Ponzi scheme cannot go on forever, it's already lasted my adult lifetime. Eventually the TSWHTF.»

Sure, myself like other people expected it to happen around 1999, remember "irrational exhuberance"? But JM Keynes wrote that the markets can stay overvalued longer you can stay solvent, and the "ancien regime" lasted several hundred years beyond its sell-by-date, and the spanish and portuguese empires also outlasted theirs significantly.

«Britain is already dropping out of the club of rich countries»

That "Britain" is just an abstraction without agency. My impression is that the english elites have decided that as they did not mind "the north" decay, they can let "the south-east" too decay, and just keep the M25 area plus some islands like Oxford and Cambridge in the circle of prosperity fuelled by dirty-money finance plus property, and immigration, as they see HK and Dubai (rather than Singapore) as models and they know those models don't scale up so much.

The south east will become a dilapidated area and a reservoir of nannies and valets, servants who must have the right accents, the "north" will remain a poor area and a reservoir of head gardeners, handymen, drivers, etc., servants who still need to understand the english spoken by their masters, but don't need to have a good accent, and the ex-commonwealth countries a huge supply of very cheap lackeys and disposable cleaners and other bulk headcount.

What can those in the pushed-behind areas do about their "sustained stagnation, literal decline and repeated failure to recover adequately from severe shocks"?

[rsm]

《What can those in the pushed-behind areas do about their "sustained stagnation, literal decline and repeated failure to recover adequately from severe shocks"?》

How about challenge the economic models that promised growth and enclosure would deliver happiness? What if we use strong basic income and re-establishment of commons to wean ourselves off of markets, and become happier in a voluntary gift economy of open source and stand-alone machines designed by engineers on a strong basic income freed from irrationally greedy managers who think selling subscriptions to centralized production is good because they get to maintain control?