Trimming Taxes: The Case for Cutting Capital Gains Tax

• Since 2008, the UK has experienced extremely low productivity growth (0.5% per year), in contrast to the US, where productivity has grown at three times that rate;

• Capital investment is the primary driver of productivity improvements, which in turn lead to higher wages for workers. Increased taxation on capital gains reduces investment and worsens the UK’s productivity stagnation;

• CGT is effectively a form of double taxation, as capital gains in most cases result from profits already taxed at the corporate level or through dividends. This reduces the incentive to invest in equities and capital-intensive projects;

• CGT does not account for inflation, meaning that investors are taxed on nominal gains, which may represent no real increase in value. This is particularly harmful in periods of high inflation;

• High CGT rates disproportionately affect start-ups, small businesses, and venture capital investment, limiting innovation, job creation, and economic dynamism. Reducing CGT would encourage more risk-taking and long-term investment;

• Countries like Belgium, the Netherlands, and New Zealand have no CGT and do not suffer from income conversion issues. In contrast, the UK’s high CGT rates lead to a “lock-in effect,” where investors hold onto assets to avoid the tax, reducing market efficiency;

• Historical evidence shows that reductions in CGT rates lead to increased tax revenues as investors are more likely to realise gains. For instance, when Ireland halved its CGT rate in 1997, revenues doubled within two years;

• Our modelling suggests that eliminating CGT in the UK could increase national income by 0.9% annually, equivalent to £25 billion, with two-thirds of lost revenue offset by increased tax revenue derived from that higher national income with further revenue increases resulting from higher investment and productivity.