Arun Advani, the assistant professor of economics at the University of Warwick’s CAGE Research Centre and a research fellow specialising in tax at the Institute for Fiscal Studies (and a co-author of last year's Wealth Tax report), made some interesting arguments in Tuesday's Guardian in favour of reforming capital gains tax.  Amongst other proposals, he advocates equalising the rates at which capital gains tax (CGT) and income tax are taxed.

The possibility of aligning (or at least bringing closer together) the rates of CGT and income tax is never far from the surface. In times of economic crisis or uncertainty, the pre-Budget rumour mill tends to start swirling with whispers of CGT increases which, in my career so far, have tended to come to nothing. However, the current economic situation, with UK government debt standing at over £2.2tn, as well as recent reports by the Office of Tax Simplification recommending sweeping changes to the current structure of CGT, could be seen by some to favour this as a potential direction of travel at some point in the not-too-distant future.

Some of the facts noted by Professor Advani (who was given access to a secure room at HMRC to view anonymised tax-returns of ultra high net worth individuals) are striking.  According to his findings, the proportion of earnings of the wealthiest individuals in the UK which are declared as capital gains rather than income has increased astronomically in the last couple of decades - by 213% between 2007 and 2017 in the case of the top 0.1%. Professor Advani considers that aligning CGT rates with income tax rates would, in 2019-20, have increased the revenue from CGT by £16bn.  

To a general population reeling from income tax rate freezes against a potential backdrop of high and sustained inflation as well as the recently introduced Health and Social Care Levy, which will affect those who earn income, rather than those who realise capital gains, the idea of increasing tax on those (often very wealthy) individuals who realise significant gains each year could be appealing.  However, CGT is paid by far fewer people than income tax and has a mean liability of over five times as much. To some, increasing this further would not be considered fair either.  In addition, owner-managed companies, as well as companies and employees who make use of share-related remuneration structures, are likely to be particularly affected and face significantly higher tax bills. In the current economic climate, in which many small businesses have struggled to survive, anything which could disincentivise business ownership and entrepreneurship while the country attempts to recover may be seen by some as the wrong move economically and politically.

Ultimately, the decision as to whether to align CGT rates with those for income tax (or indeed to increase them at all) will be a political one. Rishi Sunak gave a clear indication in his Budget speech yesterday that he hopes to see tax cuts (rather than rises) before the end of this Parliament. However, whether or not this will be possible remains to be seen. If the country's finances do not improve in the way Mr Sunak hopes they will over the next few years, an extra £16bn could prove difficult to resist.