Capital gains tax, actually all taxes on investment, should be abolished. The correct taxationsystem is:
He said the IFS had long called for the introduction of an “average rate of return allowance”.
Because here’s the thing. We like investment, investment makes the future richer. It’s what makes the future richer. As we also know, tax something and you get less of it. So, don’t tax investment to make the future richer.
And yet economic rents should be taxed. Normal returns to capital not, but “excess profits”, stuff earned by having a corner or a privilege, should be and harshly.
So, distinguish between that normal return on capital (say, the average return in the economy, something like 3 to 5% real, currently this is horribly depressed by QE but in normal times not far off normal long term gilts yields perhaps) and such excess returns. Tax the latter and not the former.
This now accords with best theory – optimal taxation theory, Mirrlees and all that – and also solves the political problem. The plutocrats get taxed and the average saver not so much.
But then just because something is sensible doesn’t mean it will become policy.