Capital Gains should they be taxed?

 

July 14 2024

Dear Colleague, 

The John McTernan interview on planetnormal@telegraph.uk was a very important one, because while he appeared to speak diligently, what he actually did was remind us of the damaging prelude to the last 14yrs which Blair & Brown presided over. None more so in speaking of the potential for Capital Gains Tax on principal residence, which he describes as taxing a 'windfall'. 

Policy changes behaviour & whilst the Thatcher years broadened house & share ownership, it was the New Labour years that saw unbridled asset inflation, house prices more than trebling in 13 years to 2010. 

Brown made many changes to the Monetary regime, including bank oversight, which led to policy too loose for too long. Mervyn King clashed often with Brown over budget deficits & asset prices, being rebuked for focussing attention on an overheating housing market. 

House prices are not included in the consumer price index, making housing a natural asset to use to protect your wealth from inflation. Many used it as a pension pot. 

This became all the more acute when policy makers latest great idea, quantitative easing, made borrowing rather than saving the obvious option. Buy-to-Let was born & people leveraged to move up. 

All of this was the result of policy, and to describe it as a windfall is, I believe, to cover up the mistakes that have been made & to punish people for making correct decisions. Decisions that to a large extent protected people from financial repression. For others, good investments, based on government-driven fundamentals. 

If CGT were indexed using real inflation numbers, calculated to include usable & essential assets such as residential housing, there would be minimal tax to pay. Instead, the Labour government is punishing people for the inflation it & subsequent governments largely created but choose to ignore. 

This raises another questions in an age of quantitative easing: Should some asset prices be included in the inflation index thus making central banks jobs easier & more honest? 

We would never go to the damaging zero bound again & monetary policy might actually become as boring as Mervyn King always hoped. 

As for the Starmer government, the warning is that, as with Blair & Brown, ill-considered tinkering rather than laissez-faire will be the order of the day. As Thomas Sowell reminds us, today's problems are yesterday's solutions. 

Best wishes, 

Bruce Goodwin