A think tank has urged the government to hike the rate of capital gains tax to match income tax levels in a bid to make the UK’s tax system fairer and increase government revenue.
Just Tax, a report from The Institute for Public Policy Research estimated the government could raise an extra £90bn over the next five years by taxing capital gains at the same rate as income.
Capital gains tax is subject to different thresholds than income tax and is generally lower for higher earners.
The think tank also thought an additional £15bn could be raised over the same period by removing the exemption of capital gains upon death, which currently means a deceased’s estate is not liable for capital gains tax.
On top of the potential benefits of reform, the current capital gains causes economic inequality and is unfair, according to the IPPR.
The report claimed two people who earned the same amount of money but from different sources could make very different contributions in tax, and those on larger incomes from a mixture of sources could have a lower average tax rate than those on lower incomes who received their income solely through employment.
The IPPR stated this was “fundamentally unfair”, claiming it distorted economic behaviour and created opportunities for tax avoidance.
Alan Chan, director at IFA Wealth & Pensions, said the IPPR’s proposals would be a “poor move” and added: “We want to encourage more people to save and invest. By increasing the tax rates, it would reduce the incentive for savers.
“Significantly hiking up capital gains or dividends taxes to the same rates as income tax rates would be disproportionate to the level of risk taken for the investor.”
The think tank also proposed a fundamental reform of the income tax system, calling for the taxing of all sources of income — earnings, dividends and savings — together and equally under a single tax schedule, with a gradually rising marginal tax rate as income rises.
According to the report, such a system would be more transparent and avoid ‘tax cliffs’ which exist in the current banded tax system.
This wouldn’t change the total amount of tax received by the government, but the richest 20 per cent would pay a larger share, stated the IPPR.