This article expresses the personal views of its author, not necessarily those of ShareSoc.
There was another article in the Financial Times today covering “How the wealthiest Americans get away with paying no tax”. The item was based on a report by ProPublica which suggested that America’s richest billionaires paid virtually no taxes on hundreds of billions of dollars of added wealth over the past decade. They only paid 3.4% of the increase in taxes. The report is based on leaked IRS data.
One reason is because the US tax system is like the UK one in that there are numerous allowances that can be claimed, and although there are taxes on capital gains these are only payable on realised gains.
The article even went so far as to suggest that unrealised gains be taxed so as to make the system more equitable (a mark to market system) or that a wealth tax be introduced. These could ensure that the tax rates on wealthy people are more similar to those paid by the normal working population.
Is it really so different in the UK I am wondering? I now know how much tax I will pay for the last financial year (an exceptionally high one in terms of capital gains tax paid) and it’s only 6.3% of overall profits (capital growth plus dividends received last year).
With a lot of the gains and dividends being in ISAs, SIPPs and VCTs, this partly explains the relatively low tax. But it is also low because of avoiding realising capital profits unless absolutely necessary in direct holdings. I sell holdings showing a loss and retain those showing profits, i.e. running the winners and selling the losers which is always a good policy to follow on stock market investment.
Is such a low tax rate unprincipled? It’s partly low because I have responded to Government policy to encourage investment in early-stage companies but it’s also because of the structure of the tax system and taking sensible steps to avoid paying tax unnecessarily. Which is no doubt what the US billionaires are doing.
Should unrealised capital gains be taxed? This is a very doubtful proposition mainly because it means taxes in cash terms could be imposed on gains which have not been realised in cash. The losers from such a system would be those who simply did not have the cash to pay the tax demands. There is also the problem with any “mark to market” system that there may be no readily available market price for many assets (property for example).
Capital gains tax rates might be raised of course, and I have no objection in principle to the rates being more aligned with income tax rates, but that might simply mean that more people postpone realising capital gains. There may not be a great increase in the net tax receipts.
It is surely better to encourage capital gain realisations so that people have the resources to invest in new business ventures and so as to ensure a vibrant economy. If any realised gains are reinvested, why should they be taxed anyway? I have suggested before that we need a new capital gains tax system to take account of roll-overs from past investments where any profits may simply arise from inflation anyway.
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )
Well, blow me down Roger but you seem to be making the case for the Self-Invested Savings Account (SISA) proposal, which Sharesoc and UKSA submitted to the Office of Tax Simplification last October.
This is basically your rollover concept write large.
Anyone could open an account, transfer funds in and buy shares or funds within the account.
Any shareholdings or funds held within the account could be sold and the proceeds reinvested without incurring any Capital Gains Tax.
CGT would only arise when cash was withdrawn from the account, and would reflect the capital growth that had accumulated within the account (assuming the account had actually grown in value).
The model even allows inflation to be factored into the calculation of capital growth, so you’d only pay CGT on capital growth in excess of inflation.
Bingo!
The full proposal can be found at https://www.sharesoc.org/consultation/capital-gains-tax-review-sharesoc-uksa-submit-joint-response-to-office-of-tax-simplification-2/