Is there indexation on investment income? No.
Or earnings from work? No.
Or VAT? No?
So what is the special case for capital gains tax? A pound of profit is just that – and equal to any other pound when it comes to taxation.
Not acknowledging the difference between current income and gains that arise over time and so are affected by inflation. What excellent economics that is.
Especially from a man who has been known to whine about the effects of fiscal drag – a result of inflation, obvs – upon income taxes.
I (“Vanessa”) pointed this out to him already, but apparently it was ‘absurd and utterly unrelated to the proposal’….
Income from work is typically taxed when it is received / indexation would be fairly irrelevant.
Income from investments is typically taxed when it is received – indexation would be fairly irrelevant.
Gains from a property sale could be received 50 years or more after the original investment was made – indexation would be very relevant.
I can’t believe you can’t see difference.
It would have a massive adverse impact on social mobility – people would potentially be selling a property on which they’ve made a gain and hen not be able to afford to buy the same house to live in elsewhere.
It’s ridiculous.
Ha! It’s no great surprise that Capt. Potato who doesn’t know what a “real Interest rate” is should be flummoxed by “the time value of money”. Flummoxed yesterday, still flummoxed today.
What was the personal allowance in 1965 vs today, and what were the tax rates similarly? How much tax would you be paying if you earned a 2024 average salary but taxed at the 1965 tax regime?
A bit of googling suggests that the Wilson supertax started at £75k, and was 95%+. So basically £75k was the top income possible, the State took almost everything over that. I mean it does have some positives, think of all the current State employees who would be squealing!
Max tax rate under Wilson was 83.3% (16/8 in the £) with an additional 15% surcharge on ‘unearned’ income. So if you were a top rate tax payer and earned £60 in interest, the state took £59 of it. And you couldn’t (legally) move your savings out of the country either. Spud has wet dreams of this happening again.
1/ Income from investments should indeed be indexed. The fact that they aren’t is a travesty.
2/ You can easily make the case that earnings from work are effectively indexed as they typically rise at, or greater than, the current rate of inflation. Indexing is just a way of compensating for inflation.
3/ VAT is a tax and not income for us though for the Government it is income. Taxes paid late do incur an interest charge linked to the bank/inflation rate so it’s fair to say that taxes like VAT are “indexed” to account for inflation.
I wonder whether the people paying the £100 late self-assessment penalty are actually pretty shrewd.
If for example inflation is running at 0.5% a month (6% a year roughly) and you get to delay paying a £20,000+ tax bill, then it makes sense to take the penalty and pay late.
I don’t know enough if this would work though.
The ‘When Money Dies’ book about the Weimar hyperinflation has a few anecdotes about paying taxes late as there was a serious inflationary saving, and a dude even calculated that going to jail and paying when he got out was worth his while.
“Is there indexation on investment income? No.
Or earnings from work? No.
Or VAT? No?”
“Is there indexation on investment income?” – it’s a standard part of tax theory that there should be indexation on interest income (i.e. you should only be taxed on the real interest rate – and to explain to Murphy, that’s the part of the interest that’s greater than inflation). I think that was in the Meade Report of 1978, it’s certainly been a standard issue written about and discussed in tax design for decades, so it’s hardly new. But then Murphy doesn’t know (or care) what anyone else has written about his subject, which is why it’s embarrassing that he’s a professor.
“Or earnings from work?” – as Mr Cauldwell has explained to him (above), there is generally no significant time lag between doing the work and being paid, since wages are generally paid monthly or even weekly, so there is very little for inflation to bite on (although if Murphy does get his MMT, inflation might become high enough to be significant over a week). But Murphy doesn’t understand basic concepts in his subject, which is why it’s embarrassing that he’s a professor.
“Or VAT?” – again, it’s a standard part of tax theory that there is an inflation / time value of money issue in VAT, that most businesses collect it from their customers but don’t have to pay it over to the tax collector until after the end of the quarter. It’s not huge, over a quarter, but it exists and is a known issue, but businesses aren’t charged for interest / inflation over that period deliberately, as partial compensation for acting as unpaid tax collectors. This has been known and written about since before VAT was introduced, but Murphy doesn’t know (or care) what anyone else has written about his subject, which is why it’s embarrassing that he’s a professor.
Bongo said:
“I wonder whether the people paying the £100 late self-assessment penalty are actually pretty shrewd. If for example inflation is running at 0.5% a month (6% a year roughly) and you get to delay paying a £20,000+ tax bill, then it makes sense to take the penalty and pay late.”
Sadly not. The £100 penalty is for being late sending in your tax return, not paying tax. If you were doing that, you’d send in the return, (to avoid the fixed £100 penalty) but not pay the tax (to get the inflation advantage).
But even that does work, because as well as the £100 late filing penalty, there’s also interest on late paid tax, which is set at Base + 2.5%. You’d have to be making more than that on your money to make paying late worthwhile. Might be worth it in some circumstances, for example if it’s a choice between paying your tax and paying off your credit card, but generally only if your finances are in a pretty shambolic state.
@Stuart Cauldwellpeople would potentially be selling a property on which they’ve made a gain and then not be able to afford to buy the same house to live in elsewhere.
I beg to differ. That’s illogical. By definition the sale price of a house will be what the buyer can afford to pay. It’s a market & in a market “values” have no meaning. Prices will fall until they find a buyer.
I have seen it work. In Russia, immediately, post-Soviet. You paid self-employed tax like corporation tax, well in arrears. A statutory interest rate (well below inflation) for late payment. And inflation at 2,000 to 3,000%. One friend said he even paid the full and due amount of tax for the first time in his life. Didn’t dodge a single thing. Just paid it late enough that who the hell cared?
@BiS
Um no. While stripping out loadsadosh by taxing the capital gain might depress house prices, it would do nothing to counter the effect of inflation over decades.
Fact is average salary today is much ‘higher’ than it was in 1980, because the £ has inflated away most of its value. So those buying a house would still strive to find N times current salary, and compete for the scarce supply. Meanwhile, I would have to pay the same, while my 1980 house sale is almost entirely capital gain because I paid N times a 1980 salary, when a £ was actually worth something.
Hence if taxed on this, I could not sell and move without a massive reduction in value/house size. Total freeze of the housing market: might even raise prices as no one could afford to sell (until they are dead, unless you are going to tax them 40% capital gains AND 40% IHT!).
The result would make it impossible to move and totally freeze the mobility of labour. Pretty much what Stamp Duty achieves already.
If you can find any part of the economy that works smoothly, you can just bet there’s a thieving idiot like Murphy or Rayner or Hunt trying to dump some emery paste into the gearbox.
We can thank the One-eyed Scotch Idiot for the removal of indexation relief. It was the only way the average punter could win from inflation, so it had to go! Expropriate! Expropriate! Expropriate!
@Bongo & Richard T
Current late payment interest rate on tax is 7.75%.
On top of that, surcharges apply if payment is 28 days late and again at 6 months late and one year late. 5% surcharge in each case. If you pay a year late it’s 15% total surcharges plus 7.75% interest.
And if you were a year late with filing your tax return it’s a total of £1,600 in late filing penalties. The penalties apply even if no tax is due.
@TtC
People can only pay than the money they have. In a market where the majority of transactions are sell to buy, the actual prices of houses is irrelevant. You get less for the one you’re selling but pay less for the one your buying. The net effect of CGT on owner occupiers would be to remove money from the merry-go-round That could lock people into property if prices fell to put them negative equity with their mortgages, though. On the other hand, first time buyers could find it easier to get on the ladder.
From what I can see, there wouldn’t be much difference between a non-CGT market & a CGT market if either is where you started from. Just that one operates at a lower price level than the other. However going from non to with would be a complete nightmare. The tax certainly wouldn’t raise anything near what would be expected of it.
The housing market’s a bit of a weird one because with any other commodity, increases in prices incentivises increase in supply. Which limits price increases as demand is satisfied. Increased productivity causes downward pressure on prices. None of that happens in the housing market because supply never meets demand. House prices are just a reflection on the money available to pay for them. Why everything government does to make housing more “affordable” just ends up pushing up prices.
Here in the US, not indexing income tax for inflation is a government pastime. There is a term for it, “bracket creep”. This is where inflation raises nominal wages even though real wages are stagnant. That pushes people into higher tax brackets, so that after tax income actually declines.
Of course the government doesn’t want to do anything about it because it brings in more dollars. Eventually taxpayers usually force the government to restore rates, but the money taken in the meantime is sweet for the tax-and-spend politicians.
I beg to differ. That’s illogical. By definition the sale price of a house will be what the buyer can afford to pay. It’s a market & in a market “values” have no meaning. Prices will fall until they find a buyer.
But even with that, it still fails.
For example: I want to sell my £40,000 house to move and buy a replacement £40,000 house. Easy, sell house, get £40,000, use it to buy £40,000 house.
But house sales are taxed. yebbut, that just means all prices fall.
Ok, so I want to sell my house which has been tax-hit to a sale price of £30,000 house to move. The destination house now also costs £30,000 because of the market impact of the tax. However, now when I sell my £30,000 house, I only have £20,000 to buy the replacement ‘cos Hector the Inspector has taken his slice. So I now *can’t* afford to move *to* *an* *identical* house, I can only afford to move to ever smaller and smaller houses.
“Yebbut, the destination house will fall to £20,000 to match the market”
But the seller *is* *also* wanting to move to a £30,000 house, so to them the market value is £30,000. If “the market” demands they sell for £20k because I’ve sold for £30k but only have £20k left, then they will demand that their destination drops from £30k to 13k as that’s all they have left after selling, and *their* destination will demand that their their destination drop their their price from £30k to £8k because that’s all that *they* have left, and before you know it, loaves of bread are “priced” higher than houses.
Thank you RichardT and AndrewC.
Not as easy to game the HMRC system in the UK as I thought.
Although Council Tax can easily be punted back several months if setting up a Direct Debit and then cancelling it before the first payment is collected and then repeating until you get a letter to say you can’t do it again. Inflation would have to be quite high to be worth the chew though.
Mojave Greenie:
“Here in the US, not indexing income tax for inflation is a government pastime. There is a term for it, “bracket creep”. This is where inflation raises nominal wages even though real wages are stagnant. That pushes people into higher tax brackets, so that after tax income actually declines.”
Exactly the case here in Australia as well, with the same terminology used. There’s been a massive debate about it recently, due to the stage 3 tax cuts that Labor decided were too generous to higher income earners.
The technical phrase is “fiscal drag” as used above…..
Moving house costs money, removals & storage, Estate Agents, Conveyancing, Stress, Duty& ….Tax.
So CGT is just another cost of moving, but with another set rates, consequences, and interactions.
If prices and inflation are constant then — nothing much. But prices change, places improve, or decline, and people change in what they consider desirable and affordable. So, a complex model; as BiS says “going from non to with would be a complete nightmare”. And thinking about second-order effects is not something that occurs to politicians, let alone potatoes.