After setting an increase in capital gains taxes designed to fill a budget hole, the UK government has adjusted its expectations for an increase in tax revenue, dropping the amount by a whopping £23 billion. Rates are changing, going from 10% to 18% for lower levels and from 20% to 24% for higher gains—and more revenue—but adjustments indicate expectations have been tempered.
Writing for AJ Bell, Charlene Young notes that the Laffer curve may be kicking in as optimal rates are surpassed, effectively driving revenue lower over the long run.
Bell states:
“The Laffer Curve illustrates the relationship between rates of tax and the amount of revenue the government would receive. It suggests that increasing tax above a certain ‘sweet spot’ alters taxpayer behaviour to the extent that the revenue would go down.”
Also from AJ Bell, Laith Khalaf, explains that higher gains taxes will hit investors and business owners where it hurts.
“Higher rates discourage risk-taking and investing in shares, and somewhat bizarrely, the biggest increase in capital gains tax has been reserved for basic rate taxpayers. Higher rates of capital gains tax deter consumers from investing in growth assets, potentially depriving them of higher long-term returns, while at the same time undermining demand for the UK stock market.”
Dima Kats, CEO and Founder of Clear Junction, a payments firm, says he always supports a reduction in taxes.
“Regardless of market conditions, lower taxes boost motivation and drive growth. However, making the UK financial services sector more competitive requires more than just tax cuts. Some jurisdictions may have zero taxes but lack credibility in financial services,” said Kats.
He believes that for the crypto sector, clarity of regulations can also benefit the digital asset industry in the UK as other jurisdictions like the EU and the US move forward with bespoke rules.
“… the impact of Brexit and the loss of the passporting regime has reduced the UK’s appeal as a hub for Fintech businesses. If I had to choose between lowering taxes or reducing regulation, I would opt for reducing regulation. I’m not advocating for reckless deregulation, but a more balanced approach is needed. The decision to bring the PSR under the FCA was a positive step, but there is still much to be done to make it easier to operate financial services in the UK.”
Of course, a better answer may be to have regulatory clarity along with lower taxes that incentivize investment and risk taking. Unfortunately it appears that Labour government does not share this belief.