Why are Capital Gains taxed at a lower rate than Income?

Brendan Burgess

Brendan Burgess

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Why should capital gains be taxed any differently from income?

Index the acquisition costs for inflation so you tax the real gains.

Why should a person who does not earn enough to pay Income Tax, pay CGT on their gains?

Why does someone who pays 52% tax on their income pay only 33% on their capital gains?

Is it to encourage savings and investment? But surely the same could be said for Income Tax. It should be lowered to encourage working and earning.

The UK's policy on this has changed a lot over the years.
  • In the 70s unearned income was taxed at 98%
  • But now a person can put £20,000 a year into an ISA. The dividend income and capital gains are not taxed in an ISA. (I don't think that there is a limit on this. Over 20 years, you could put £400k into an ISA.)
  • Even outside an ISA, you have a CGT allowance of £12,300 a year. And the CGT rate after that is 20% on shares and 28% on property.
Ireland already has one of the highest rates.

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An argument is used that a lower rate of CGT increases the overall tax take.

I doubt that is true. It might change the timing of it. If the rate were reduced to 20% in the morning, people would probably realise some gains. But these gains would be taxed eventually.

Brendan
 
Brendan Burgess said:
An argument is used that a lower rate of CGT increases the overall tax take.

I doubt that is true. It might change the timing of it. If the rate were reduced to 20% in the morning, people would probably realise some gains. But these gains would be taxed eventually.

Brendan
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Wasn't there a substantial collection of CGT when the rate was reduced by Charlie McGreevey?

If CGT rate was the same rate as income tax, where is the incentive to invest in equities when one considers risk and costs ?

People are slow enough to cash in equity gains as it is when paying 33% rate... I'd imagine people would fail to realise gains and miss out on potential benefits and government's miss out on potential tax..
 
Bluefin said:
Wasn't there a substantial collection of CGT when the rate was reduced by Charlie McGreevey?

If CGT rate was the same rate as income tax, where is the incentive to invest in equities when one considers risk and costs ?

People are slow enough to cash in equity gains as it is when paying 33% rate... I'd imagine people would fail to realise gains and miss out on potential benefits and government's miss out on potential tax..
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+1, on all counts.

Besides, almost nobody is paying an effective income taxes (plural) rate of 33%,
 
T McGibney said:
Besides, almost nobody is paying an effective income taxes (plural) rate of 33%,
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Good point.

But why not combine them? Treat Capital Gains as Income and subject to the same taxes.

The effective tax rate on combined income and CGT would be less than 52%

Brendan
 
It's all down to risk Brendan...

I've worked in the MN sector for over 30 years... I've felt there was very little risk of unemployment if I was flexible to industry type /location/ position .. I'm afraid I can't say the same in relation to my equity holdings.. A thrid doing well, thrid breaking even and rest down 40% and all investments in A+++ companies and this is before costs, time spent and now inflation..
I'm not one of those unrealistic investors.. I'd consider a return after all taxes /costs of 4/5 % a very good day..
 
Brendan Burgess said:
Good point.

But why not combine them? Treat Capital Gains as Income and subject to the same taxes.
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33% CGT is bad enough Brendan. 52% would be a disastrous disincentive against investment in anything. Remember we already have a grotesque housing shortage, a grossly undercapitalised indigenous business sector, and severe underinvestment in built property, a lot of it literally falling down. The higher you raise CGT, the more people will realise that taking a punt on something is just not worth it.
 
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I have separated this out from the other thread as they are dealing with different issues.

Let me tease this out a bit further.

If I have never worked a day in my life but inherited my wealth so I am living off my investment income.

Why should it be taxed at 33% while those who are working pay 52% on their marginal income?

OK, if I go to work, I am not taking any risk. I will get paid at the end of the month.

If I invest in a property or shares I am taking risk. So it is argued that I should be rewarded for that risk by paying less tax. But doesn't the reward for taking risk come from the expected higher returns?

Brendan
 
In comparison to income tax, CGT is under much more competition.

You can sometimes choose when and where CGT gets paid, if you're living off inherited wealth - you can live anywhere you want.

If someone had built up large profits on a share portfolio you might move to Belgium for a few years and turn them to cash there at 0% CGT.
 
Brendan Burgess said:
Good point.

But why not combine them? Treat Capital Gains as Income and subject to the same taxes.

The effective tax rate on combined income and CGT would be less than 52%

Brendan
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Brendan, the effective rate is irrelevant in any decision to dispose of an asset or otherwise realise a capital gain. If the person making the disposal is earning over €40k per year (which I would guess be typical of most CGT payers), they're almost definitely facing 52% tax on the resulting gain. They have already used their tax credits and lower tax band to cut the tax charge on their income.
 
ashambles said:
In comparison to income tax, CGT is under much more competition.

You can sometimes choose when and where CGT gets paid, if you're living off inherited wealth - you can live anywhere you want.

If someone had built up large profits on a share portfolio you might move to Belgium for a few years and turn them to cash there at 0% CGT.
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You can also choose never to sell an asset if you want to avoid paying CGT. In 1980s Ireland it wasn't unknown for 70 year old men to be still working on their parents' farms, so Retirement Relief was introduced to incentivise over-55s to dispose of farms and other business assets. That pattern is now repeating itself in relation to housing where children are being reared in homes owned by grandparents who can't afford to dispose of them.
 
But if you are an income tax payer you get a paye and a personal allowance which means you earn circa 18k tax free ,then only 20% up to now 37k. The government has also been moving these bands upwards in order to protect income tax payers somewhat from inflation.

With CGT you can only earn 1270euros tax free as opposed to 18k for income tax and this has been stuck at the same level for decades now. Aswell all gains are then fully taxed no account or indexation is made for inflation now at 9% per annum. Therefore that reduction in real value of investment by inflation is also taxed thereby actually taking away from the initial capital invested. As it is ireland has one of the most onerous regimes in Europe for investment gains and income
 
Brendan Burgess said:
I have separated this out from the other thread as they are dealing with different issues.

Let me tease this out a bit further.

If I have never worked a day in my life but inherited my wealth so I am living off my investment income.

Why should it be taxed at 33% while those who are working pay 52% on their marginal income?

OK, if I go to work, I am not taking any risk. I will get paid at the end of the month.

If I invest in a property or shares I am taking risk. So it is argued that I should be rewarded for that risk by paying less tax. But doesn't the reward for taking risk come from the expected higher returns?

Brendan
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I imagine it goes back a long way when only the wealthy were able to afford for public office and they shaped the legislation to benefit themselves.

That is not to say it should be equalised upwards though. Much more people have private investments now and there are a million threads on this site giving out about 41% exit tax on funds/ etfs. The top rates of tax in Ireland is already high (11% USC for the self employed earning over €100k!! :oops:).

I wonder how many people have never worked a day in their lives and just lived off inherited income? I wouldn't say it is that many and a lot less to those who don't work and get all their income directly from the State. Should we have legislation to specifically catch them? Would this not be disproportionate?
 
Brendan Burgess said:
That is a very good point. It's probably very few.

Brendan
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Whatever I have to leave to my kids, I will already have paid Tax, USC+ PRSI on the earned income used to buy it- all at higher tax rates.
If property (which is most of us) we will have paid other taxes too- Property etc.
If it goes above the limits, they will pay an additional 33% on anything inherited- I think that's absolutely enough.
 
If an asset is bought out of already-taxed income, should any gains from the asset be taxed again at regular income tax rates?

I'm not sure what economic theory says about this question.
 
In 2006, The OECD published a paper on CGT tax policies here which is very long but quite interesting:

read.oecd-ilibrary.org

Taxation of Capital Gains of Individuals: Policy Considerations and Approaches | READ online

This book investigates policy considerations in the taxation of capital gains of individuals and design features of capital gains tax systems. Perspectives on these are reported for 20 OECD countries. Descriptive information on aspects of capital tax rules for gains on domestic assets of...
read.oecd-ilibrary.org read.oecd-ilibrary.org

The different approaches are amazing.

On death
1) Some exempt capital gains as Ireland does
2) Some deem it as a disposal so CGT becomes due
3) Some deem the beneficiaries to have acquired the assets at their original cost to the benefactor

A big concern that the paper has is over "lock-in effects". That is where people hold onto assets to avoid paying CGT.
Some tax Capital Gains on an accrual basis, rather than on a realised basis. Ireland, for example, taxes gross roll up funds on an accrual basis with deemed disposal every 8 years.
 
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