Why the IFS is wrong on CGT taper relief
Posted by Christie Malry on June 10, 2010 at 10:18 am
There's only one Robert Chote. He's rightly respected by all commentators for his sensible, well-articulated views on economics. However, sometimes the IFS wants to say something on a topic and Robert's not around. Then this happens:
The Institute for Fiscal Studies (IFS) said plans to taper the rate from profits on shares, second homes and other assets according to how long they have been held - a key concession to head off a revolt by Tory MPs - is "misguided".
"Taper relief is a dreadful idea," IFS senior research economist Stuart Adam told the Financial Times. "It is highly undesirable in terms of its economic effects.
"Persuading people to hold on to assets they would otherwise sell, to get a lower tax rate, is a misguided thing to do."
We already dealt with this - because government(s) can't be trusted not to let inflation run rampant, we need taper relief and/or indexation to protect the innocent. Indexation, although complicated to calculate and administer, is fairer for addressing inflation. But taper relief also has a role: it differentiates between those who have bought assets solely to make a quick turn and those who have bought assets to improve and develop over a much longer period, and who then will be looking to make a sensibly-timed exit. To view these people as "holding assets they would otherwise sell" betrays a peculiarly distorted, economist's view of the world.
If we want to raise the CGT rate (and I think we do, no matter what the Wicked Witch of the Lords, Baroness Noakes, might say), we need to protect entrepreneurs who have held or intend to hold assets for a long time and we need to protect people from inflation. Entrepreneurs generally can't put their companies into pensions, so they need some other way of protecting their retirement. That basically means taper relief because it's fair, regardless of whether economists view it as pure.
By the way, Stuart Adam studied PPE at Oxford - run away, run away!
"Third, we should not try to bribe people into holding assets for longer than they would otherwise wish to do — economic welfare is best served by having assets owned by the people who value them most. The previous government justified taper relief as a way to discourage short-termism, but encouraging people to hold assets for longer than they want is not the same as encouraging companies to undertake productive investments that may take a long time to pay off."
Think you'll find Robert Chote wrote this in The Times the other day, so your issue is with him as well!
http://business.timesonline.co.uk/tol/business/co...
Yes, I was being facetious in attempting to drive a wedge between Chote and
his team. It's so often him, that I was amused to see another name.
I still don't accept their argument - that you can in any way equate a
short-term frothy gain to a long-term sustained, hard-earned gain. We want
proper gains, not pump-and-dump \"Fosbury Flop\" gains.