THERESE RAPHAEL: A muddle of mixed incentives governs UK taxation

British Prime Minister Rishi Sunak addresses delegates during the COP27 summit at Sharm el-Sheikh, Egypt, November 7 2022. Picture: REUTERS/STEFAN ROUSSEAU

Deciding where to administer that pain — decisions chancellor of the exchequer Jeremy Hunt has described as “eye-wateringly difficult” — will tell us a lot about the principles of Sunakism. Britain is already a high-tax country, with an effective 60% marginal rate on incomes between £100,000 and £125,140.

A bigger clue into Sunakism may come from a tax that generally delivers only a small share of revenue. An overhaul of the capital-gains tax has been mooted for a while and was recommended by the Office of Tax Simplification in 2020 after the Treasury ordered a review. Sunak ultimately decided against acting. The opportunity may be harder to pass up this time.

The US has taxed capital gains for more than a century, but Britain had no capital gains tax until the 1960s under Labour chancellor James Callaghan. The Tories have form on increasing capital-gains tax. Margaret Thatcher’s tax-cutting chancellor Nigel Lawson aligned capital gains tax with income tax in 1988, giving Britain the world’s highest CGT at 40% for top-rate taxpayers. Labour chancellor Gordon Brown brought it down to 18% in 2008, before Osborne hiked it to 28% in 2010.

Warnings of an investment retreat might be overblown or could at least be mitigated. Research from the Institute for Fiscal Studies found that while businesses respond to tax incentives in deciding how and when to realise gains, capital gains tax does not affect the amount of income they create or levels of investment.

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