Capital Losses: Why increasing CGT will deter investment, slow growth and reduce revenue

• The Chancellor is reportedly considering hiking capital gains tax (CGT) in next week’s Budget, as part of plans to find £40 billion in spending cuts and tax rises
• CGT is widely accepted to be a damaging tax – hampering investment and economic growth and raising relatively little
• Recent modelling by the Centre for Policy Studies and the US-based Tax Foundation found that raising the CGT rate to 33%, 39% or 45% would lead to the UK falling from 30th in the OECD for overall tax competitiveness to 32nd, 33rd or 34th.

A new report from the Centre for Policy Studies (CPS) highlights the damage that will be done to the economy if, as reported, the Chancellor uses next week’s Budget to hike capital gains tax (CGT).

Despite raising relatively little revenue for the Treasury (1.5% of all revenue), CGT is an incredibly distortive and complex tax, paid by just 369,000 taxpayers in 2022-23.

‘Capital Losses’ by Daniel Herring, CPS tax and fiscal policy researcher, highlights how the current CGT regime derives 80% of its revenue from just 38,000 individuals. Even small behavioural changes from this group in response to the Budget could have major revenue impacts, the opposite of those the Chancellor envisions, as people move assets overseas to more tax competitive environments or hold onto assets forlonger to avoid being liable for taxable gains.

Such a move would reduce revenue, drive away investment and damage economic growth.

Recent modelling by the CPS has shown that raising the CGT rate to 33%, 39% or 45% would lead to the UK falling from 30th in the OECD for overall tax competitiveness to 32nd, 33rd or 34th. Such a move would leave the UK with one of least competitive tax regimes in the OECD.

Even by the Treasury’s own calculations, hiking CGT by 10 points would lower revenue by £2bn over three years. When CGT was raised in the US in the 1980s, total revenue fell dramatically.

The report instead urges the Chancellor to take a longer-term view. The author makes the case forreductions in CGT to promote entrepreneurship and boost investment as part of a wider strategy on growth. Over the last decade, when headline rates of CGT were lowered, revenue as a percentage of GDP increased.