Labour’s cap­ital gains tax hopes look illus­ory

Regard­ing your art­icle “Tax rises will dis­cour­age risk-takers, warn tech investors” (Report, Septem­ber 5), higher taxes will cer­tainly affect the growth pro­spects of start-ups and the risk appet­ite of their investors, but estab­lished com­pan­ies are also likely to suf­fer. Not all big com­pan­ies sit on a pile of cash, with many need­ing to raise cap­ital from investors to fund new invest­ments. With a higher cap­ital gains tax rate, this will simply become much harder. Research shows that com­pan­ies may ulti­mately cut invest­ments and jobs.

One altern­at­ive solu­tion is to increase cap­ital gains tax rates for short-term hold­ings. This would allow com­pan­ies to raise cap­ital from long-term ori­ented investors, while tax­ing investors who are after the quick win. Research shows that hav­ing a higher short-term cap­ital gains tax rate, while main­tain­ing a lower long-term cap­ital gains tax rate, can res­ult in more innov­a­tion and pat­ents, and there­fore growth.

Increas­ing cap­ital gains tax is unlikely to have the impact the UK gov­ern­ment hopes. Investors will scale back their real­isa­tion, thereby redu­cing the poten­tial for addi­tional tax rev­en­ues.

If the UK gov­ern­ment really needs tax rev­en­ues, it is the VAT or the per­sonal income tax that have the poten­tial to gen­er­ate rev­en­ues. This is just the eco­nomic real­ity, although it might not be the polit­ical one.

Mar­tin Jacob
Pro­fessor of Account­ing and Con­trol, IESE Busi­ness School, Bar­celona, Spain Mem­ber of Sci­entific Advis­ory Board, Ger­man Min­istry of Fin­ance, Ber­lin, Ger­many