Incentives, incentives

Capital gains tax Entrepreneurs Relief does, in essence, reduce the rate of gains tax by those who sell privately owned businesses. In most situations they pay 10% on their gains rather than 20%. The tax rate is halved.

In the last year for which data is available the relief cost as much as the tax paid on these disposals, or £2.36 billion. Of this £1.73 billion went to just 4,000 people, at a tax savings of more than £430,000 each, on average.

That is wholly unjust. It is a simple boost to those already wealthy. Remember, these people had by definition just picked up gains of in excess of £4 million each. And as I have argued before, the relief makes no sense. It does not encourage entrepreneurial activity at all. It encourages short-termism and selling out rather than developing entrepreneurial activity, both of which are the opposite of what the UK needs.

Nothing about this relief makes any sense at all. It has to go.

Rule number one in economics. Incentives matter.

A corollary of which is that we get less of those things which we tax. Because that reduces the incentive to do those things which are taxed.

We like people being entrepreneurs. They end up – as Bill Nordhaus pointed out – keeping about 3% of the total value created by their endeavours. The other 97% largely flows to consumers in the form of the consumer surplus. We like people working hard to make us richer. Therefore we let them keep more of the already trivial portion of the value created they get to keep in order to create that greater incentive to crack on with it.

This does not make sense in what manner?

12 comments on “Incentives, incentives

  1. The start point is: all property, that includes the person and productive output, belongs to the State.

    Once you understand that Comrade, it all becomes clear.

  2. “the relief makes no sense. It does not encourage entrepreneurial activity at all.”

    Whereas Spud’s plan to tax capital gains at the same rate as income tax will?

  3. “In most situations they pay 10% on their gains rather than 20%. The tax rate is halved.”
    “In the last year for which data is available the relief cost as much as the tax paid on these disposals,”

    My word! There’s something he understands.
    1/2 = 1/2

    Year 4 arithmetic

    Is this a first?

  4. “This does not make sense in what manner?”

    From the embittered position of spitefulness and envy of an irascible, late middle-aged, trainspotting singleton.

  5. Of course, when Ritchie sold his accountacy firm he would have got taper relief and paid an effective CGT rate of….. 10%. I assume he paid income tax rate on his gain as he advocates others do.

  6. Why do we disincentivise employment, labour, and consumption so much then? Don’t we want more of those too?

  7. Why do we disincentivise employment, labour, and consumption so much then? Don’t we want more of those too?

    We would love more.
    Unfortunately we have lite-communists in power.

    There’s plenty of overtime at my work that goes unfilled.
    Nobody can be bothered because the tax makes it not worthwhile – we’d rather stay at home and enjoy life.
    Lower the tax rate and the number of uncovered shifts would drop.

    These are taxed because its a captive market – people have to work to eat.

  8. Rob,

    Grant are a way of avoiding VAT. If he’d been paid to write those reports he’d soon pass the VAT threshold (doesn’t he want that set at zero anyway?).

  9. A Tax & Economics Expert Speaks

    Alexandria Ocasio-Cortez fancies herself as an expert on marginal tax brackets. So let’s ask her about them

    AOC Graduaded From The Spud School with a BA Economics and International Relations

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