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?