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Earned income taxed twice as heavily as capital gains for some in UK, study finds
(www.theguardian.com)
this post was submitted on 20 Aug 2023
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UK Politics
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Capital gains tax discourages investment and innovation. Income tax discourages work. Pick your poison.
You can raise some tax revenue by shifting the tax burden to 'bad' things instead of 'good' things - pollution, congestion, unhealthy foods, etc. But you can only go so far with these (at some point Pigouvian taxes start to become too successful...) and even then a lot of people flip out at having to pay fuel duty, congestion charges, etc.
I mean, we do need to raise taxes somehow. It turns out voters expect quite a bit from the state.
Are either of those statements true? Does capital gains tax ACTUALLY discourage investment? Does income tax ACTUALLY discourage work?
I'm an accountant and have clients regularly ask me how much tax they would have to pay for a certain investment before they make a decision. It absolutely dissuades some people.
Absolutely, a change to CGT may affect the risk-return profile of individual investments and might make some unpalatable. But it wouldn’t slow or stop investing altogether. One thing that has a bigger effect would be how much spare money people have to invest, how much they earn above their costs of living.
People have a financial incentive to invest their money somewhere (stock market, bonds, businesses, property, interest-bearing bank account) because if they don’t, their money devalues. Economically speaking it doesn’t matter so much where, so long as money cycles around the country and doesn’t sit doing nothing - or leave (which is another issue with global investments). A change in CGT would have to be hugely disruptive to change that incentive.
This is pretty basic economics. Supply curves slope upwards - the higher the price people are offered for something, the more it people are willing to supply. It's exceptionally intuitive but there's reams of empirical evidence to support it if the concept isn't obvious enough to you.
To start with I think we need to stop giving credence to bunkum theories that state that people are free to provide or withhold their services as they see fit. It’s not the case for the majority of people.
Most people cannot afford not to work, they have no choice until they are financially secure enough, which few are. Either that or they physically can’t work, but in most cases they MUST work to pay rent, eat, survive. Even if you’re specialised in any job, when unemployed it’s only a matter of weeks before you need to pick any job, whatever you can get. Raising or lowering income tax will not affect that, only the amount of money you have when employed.
Even if you don’t HAVE to work, the financial incentive is always to work, because it gets you more money, which is the promise of a better time. Changing income tax doesn’t affect that either, just the rate at which you accumulate wealth, but if you don’t have to work at least you have a choice not to.
What affects employment more than income tax? Employment taxes. Because a business finding it cheaper to employ more staff… employs more staff. That financial incentive again, and a completely different set of levers. You can increase income tax and decrease employment tax, or both together, whatever. Independent.
You know what else can take people out of the workforce? Reducing CGT. It allows people to retire earlier or live off their investments. Changes the threshold of where your financial incentive to work balances your body’s ability to can. Whether that’s good or bad depends on your point of view.
On the subject of CGT, again, look at where the financial incentive lies. At what CGT threshold does it become more profitable not to invest in some vehicle, even risk-free-rate bonds, rather than stuffing a mattress? CGT only affects realisation of assets, so with a rate increase you would expect an increase in longer term investments, you might see people delaying retirement. It’s unlikely to affect actual investment, really only the amount of ready cash people have affects that. Lower income tax/higher CGT may actually increase investment in that case (though it’ll probably be mostly invested in other countries through SP500 or global trackers, so maybe not a good thing for the country).