The Labour party will need to raise taxes if they want to meet their manifesto promises. That particularly applies to Capital Gains Tax which is always a good socialist target for those who think it is “unearned” income that people have not had to work hard to obtain which is blatantly untrue if your wealth comes from developing a business before you sold it. According to Rachel Reeves they have not even ruled out taxing the profit on the sale of your own home which has traditionally been excluded.
This is not such a daft idea as it might seem at first sight. People in the UK rely way too much on housing wealth to provide for their retirement instead of investing in a business. That is one reason why housing is so expensive – people buy houses as investments rather than simply as somewhere to live. So capital gains tax on houses would help to change the excessive devotion to housing wealth in the UK. It might also free up some underused space in big houses. But it would create enormous problems if the gain was not index-linked. With capital gains tax at 40% it would make it impossible to move house in pursuit of a new job if you had owned a house for a few years. Reducing labour mobility is never good for the economy.
There is a very good article by Michael Fahy on why London-listed small caps have dropped by a third over the past 20 years in the Investors Chronicle. This is indeed a major problem. Pension funds and institutional investors have been selling equities, particularly in recent years. There is a quote at the end which reads: “You can’t have deep and effective capital markets unless you have deep effective pools of long-term capital. We have big pools of long-term capital in the UK – the second largest in the world. They’re just invested in the wrong place”.
This is indeed the major issue which needs tackling and it arises from the regulatory structure of pension funds which has made the managers so risk averse that they shun equities.
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )
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