Capital Gains Tax

IrishMark

Hi all, I'm fairly new to Economics and Economic theory, but it seems fairly criminal of me not to understand it better in the climate we live. So I've taken to delving into as much economics as I possibly can. Reading today's Observer, Britich Chancellor,George Osborne, stated amongst other things that "We've also dealt with one of the biggest sources of abuse that we inherited from the last government: the capital gains tax system. We want to encourage genuine enterprise and risk-taking. Instead we found a regime where some of the richest people boasted about paying less tax than their cleaners, by shifting their income into capital gains." Now, I've figured out what CGT is, but I don't understand how one might switch to it, what people may switch to it from and why youu might want to switch to it. Many thanks in advance.

andrew

Capital gains tax is the tax paid on money earned, in general, through investments. Stocks would be a good example. It's taxed at about 20% I think, which is a rate lower than income tax. The idea is that since investment is good for the economy, a low CGT induces investment and helps the economy. The problem is, of course, the switching that's mentioned above. What this really means (AFAIK) is that people are seeking to earn a larger proportion of their income through investments which, while qualifying for CGT, aren't actually conducive to actually creating investment. If you could link the original article, perhaps I/someone could clarify further.

IrishMark

Thanks Andrew, that's very helpful. The link is:
http://www.guardian.co.uk/commentisfree/2011/aug/27/tax-cheats-coalition-george-osborne
But I still don't completely understand. Could you perhaps dumb the following sentence down a bit to help me understand?

"What this really means (AFAIK) is that people are seeking to earn a larger proportion of their income through investments which, while qualifying for CGT, aren't actually conducive to actually creating investment."

Are you saying that people are claiming via CGT whenever they should be claiming via income tax. If so, how is this possible and how do they manage to get away with it?

Many Thanks,
Mark.

andrew

IrishMark wrote: »

Thanks Andrew, that's very helpful. The link is:
http://www.guardian.co.uk/commentisfree/2011/aug/27/tax-cheats-coalition-george-osborne
But I still don't completely understand. Could you perhaps dumb the following sentence down a bit to help me understand?

"What this really means (AFAIK) is that people are seeking to earn a larger proportion of their income through investments which, while qualifying for CGT, aren't actually conducive to actually creating investment."

Are you saying that people are claiming via CGT whenever they should be claiming via income tax. If so, how is this possible and how do they manage to get away with it?

Many Thanks,
Mark.

I was slightly wrong in what I said in my previous post, about how people are claiming CGT on their income. It's more complicated than what I thought was the case. While It's not clear from the article the exact way that CGT is being abused, but one way which it can be abused is if a person creates a kind of personal company. Any money making venture they embark on is done through this company, and the earned money becomes an asset of that company. When this money is transferred back to the individual, so that it becomes the individual's money (and not their company's) it's taxed as Capital Gains, and not as Income tax. That way, their income is taxed at around 20% and not at the 20%-40% level which 'income tax' commands.

The reason they can get away with this, and schemes like this, is because often such schemes aren't illegal. While tax evasion is illegal, tax avoidance (the exploitation of loopholes and blind spots) isn't. When wealthy individuals employ accountants and tax advisers, part of their job is to exploit such loopholes and so enable their clients to retain as much money as possible.