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Capital Gains Tax – Fine tuning to make it work

Comment 5th July 2010

The recent change to CGT seems to be the result of the 'necessarily' rapid negotiation to create an effective coalition, and is consequentially too simple.

It is necessary to prevent the CGT option being used to reduce income tax liability.

The big difference between a Capital Gain and an Income Gain, is that the Capital Gain is often the result of taking an entrepreneurial or other financial risk, therefore the tax is only on the winnings from those risks disregarding the losses. Consequentally it is 'overall' a harsher tax than Income tax which is on a 'certain' gain with no risk of loss.  

The entrepreneurial portion of the gain is likely to grow with time and the Income portion reduce, therefore I propose that:

CGT be set at the top rate of Income tax in the first year, (or added to the individual's income tax liability), reducing to a nominal amount, say 5% (to insure a tax record is kept) at year ten.

The only exception to this would be retirement sales where up to 50 times average earnings could be used to purchase an annuity which would be tax free.

Why does this matter?

CGT is essentially an elective tax as was seen in the 1980's the CGT take increased when the rate was eased and avoidance was less profitable. Proving that most people prefer to be honest.

The current blanket rate will effectively freeze the assets of all those who can avoid forced sales, consequentially putting a brake on their existing entrepreneurial activities and reducing motivation to open new ventures.

Bottom line is, ease it up, take more tax, look good while doing it, deter only short term cheats, make fewer criminals, allow people to retire under control.

Everyone  benefits but the cheats.

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