According to , Andy Burnham is weighing up plans to increase Capital Gains Tax (CGT) in the forthcoming Budget statement. Proposals being considered by the Chancellor and Prime Minister allegedly include hiking the rate of CGT to 45 per cent, to match the current highest level of income tax paid by individuals earning over £125 000 per year – known as the ‘additional rate.’ This would amount to a near-doubling of the current 24 per cent maximum rate of CGT.
Such a policy would be a disaster for Britain’s already anaemic growth prospects. The UK lags near the bottom of OECD countries for capital investment, with private sector investment hovering at around 10 per cent of GDP compared to 18 per cent in Japan, 15 per cent in the US and 13 per cent in France.
Although Britain’s Capital Gains Tax regime is not the primary cause of our malaise, any increase to the CGT rate in the current economic environment will encourage businesses and individuals to hang on to their assets, rather than selling up to fund further investment and boost growth.
There is certainly an argument for closing the gap between the rates of CGT and income tax. In the UK entrepreneurs are incentivised to sell off start-up companies to overseas investors rather than scale them up here. For talented young tech founders, for instance, it makes more sense to divest of your company now to a US venture capitalist in exchange for a life changing amount of money and suffer a one-off low-rate CGT hit, rather than take the enormous risk of trying to build a profitable business over the long term in such an anti-business climate.
But the better way for the Chancellor to disincentivise premature divestment would be to lower the rates of income tax and corporation tax closer to the level of CGT rather than the other way around.
Attempting to use Capital Gains Tax as a cash cow would be a disastrous move in itself. Yet Burnham and Healey’s plans for how to employ the additional revenue could be equally calamitous for Britain. The Treasury estimates that increasing CGT to 45 per cent for high earners would raise an additional £14bn a year. The Telegraph reports that the Chancellor intends to use the money to raise the personal tax-free income allowance to £15,570.
UK government debt currently stands at just shy of £3tn. That’s £43,000 for every man, woman and child in Britain. Borrowing costs are soaring, rendering our economy dangerously fragile. Any additional fiscal headroom – whether created through spending cuts or tax rises – should be used to reduce the deficit and pay off our debt. This Labour government is acting like an irresponsible spendthrift, shifting its debt from one maxed out credit card to another. But sooner or later, decades of profligacy will catch up with us.
Yet even in a more favourable economic climate, increasing the personal tax allowance and exempting an estimated 3 million people from tax altogether is not a wise move. No one likes paying tax, but doing so gives individuals a stake in our democracy. It reminds us that the services we receive from the state – from transport infrastructure to the NHS to the state pension – are not free, but have to be paid for from the hard-earned incomes of individual citizens.
Once upon a time, spending money was a relatively minor part of the state’s activity. Before the First World War, government spending amounted to around 10 per cent of GDP. Between the wars this rose to 25 per cent.
In 2026, however, government expenditure has reached £1.27tn or 45 per cent of GDP. When taxpayers go to the polls, we are making a decision about which politicians and which political parties we want to be in charge of spending our money. Voters who don’t pay tax, in contrast, are choosing who should spend other people’s money. It’s fair to say that the interests of these two groups may diverge; for those who are net beneficiaries of state spending (now over half of all handouts households), there is a clear incentive to cast their ballot for those who promise more spending. This impulse is at least partly responsible for our current economic woes.
The narrower the tax base, the smaller the number of people who have an interest in voting for low tax policies. Britain already has the most ‘progressive’ tax system in history, with the top 10 per cent of earners responsible for 60 per cent of income tax revenue. It is widely accepted that wealthier people should contribute more, but we have taken this principle to the extremes: in Britain, hard work, ambition and aspiration are now positively discouraged by our tax rates and thresholds.
As a result of fiscal drag, the salaries of those in ordinary occupations like policing, teaching and nursing can now be subject to a higher rate tax. When pension contributions, national insurance, student loan repayments and child benefit clawbacks are included, middle earners can face an effective marginal tax rate approaching 80 per cent, meaning employees keep just 20p in every additional pound that they earn.
When the higher rate tax was introduced in 1988, it caught only the very top earners, yet now ordinary people are penalised for taking overtime and promotions. It is a further blow to many of these grafters to know that their taxes are being taken and redistributed to the over 4 million welfare claimants with no requirement to work.
When income tax was first introduced in 1799, it was a temporary levy on the top 1 per cent of earners to fund the Napoleonic wars. Following victory over the French at Waterloo, Parliament repealed the tax, arguing that it was inappropriate in peace time and a gross infringement of privacy.
At the time, anti-tax MPs insisted that all official records, income assessments and tax returns be publicly cut up and burned to ensure the tax could never be reinstated. Although income tax was temporarily reintroduced in 1842 – at a rate of 3 per cent – in the face of a growing budget deficit, it wasn’t until 1909 that David Lloyd George’s government transformed income tax from a tool to raise revenue to an instrument for social redistribution.
Lloyd George’s aims were unquestionably noble, and pensions, benefits and the NHS have undoubtedly lifted millions of British people out of poverty. But as the Centre for Social Justice has proven, it is now possible for an individual to claim more in benefits than can be earned in a minimum wage job. And when benefits like the state pension and PIP are not even means-tested, most Conservatives would agree that redistribution has gone too far.
For society to be, and to feel, fair, we must retain the link between effort and reward.
Redistribution has become a ratchet that no government seems to be able to unwind, as more and more voters become beneficiaries of, rather than contributors to, the public purse. The net result is a growing gap between what Britain earns and what Britain spends. It has been over a quarter of a century since our nation recorded a budget surplus. The OBR forecasts that, on the current trajectory, the UK’s debt to GDP ratio will balloon to 270 per cent by 2070. Clearly, we will be bankrupt well before then.
It is futile to hope that our present government will seek to reverse this trend. Redistribution is Labour’s aim, and with endemic economic illiteracy on the party’s back (and front) benches, we can be all but certain that next month’s Budget will do nothing to cut state spending, or incentivise wealth creation. Rather, inevitably, Chancellor John Healey will increase the number of people dependent on the state, and – if reports are to be believed – exempt millions of people from income tax altogether. This is how socialists remain in power.
Yet the Treasury cannot bite the hand that feeds it forever. There will be a reckoning, whether by virtue of an economic catastrophe, war or a bond market crisis. Such a calamity could be avoided if the Prime Minister, guided by the long-term best interests of our nation, rather than the short-term demands of his political base, took decisive action to cut spending and incentivise growth. I for one am not holding my breath.