Capital gains tax: this frog can read the thermometer

David Smith in The Sunday Times makes a neat point about Chancellor John Healey's first Budget. The fiscal rules he inherited from Rachel Reeves have got even tighter thanks to rising borrowing costs, so he needs money from somewhere, and capital gains tax looks tempting. Receipts hit a record after Labour's first Budget raised the main rates, and matching CGT to income tax rates has long been a Labour ambition. Smith's conclusion is that if Healey is going to raise it, he'd be wise to do it slowly – boil the frog, as it were.

B### But is this a good idea?

CGT isn't like income tax, where your employer takes it every month whether you like it or not. It's effectively a voluntary tax: you only pay when you choose to sell. That makes it unusually sensitive to expectations.

Rumours of a rise trigger a rush to sell. An actual rise encourages people to sit on assets, sometimes until they die, at which point the gains are wiped clean for CGT purposes. Now imagine a policy of nudging it up a bit at every Budget. You get a permanent cycle of pre-Budget speculation, fire sales and then investment paralysis, which produces a lumpy, unpredictable revenue line that's a nightmare for anyone trying to plan the public finances.

In other words, this frog gets a briefing from the financial press before every fiscal event, and it knows exactly what the thermometer says. City AM notes one estimate that equalising rates could raise about £14bn a year, but also that CGT receipts have a habit of yo-yoing. Gradualism maximises the yo-yo.

The case for doing it once

To be clear, I'm not against the principle. It's hard to justify why a pound made from selling shares should be taxed more lightly than a pound earned stacking shelves, and the tax is still only paid by a small minority of people.

But if you believe that, the sensible approach is a single, clearly signposted reform rather than salami-slicing. Set the new rates and stick to them, and pair them with some relief for inflation so people aren't taxed on gains that only exist on paper. Close the loophole where gains disappear at death, so nobody has a reason to hang on until the undertaker arrives. Then promise not to tinker for a full parliament, which removes the incentive to game the timing.

Final thoughts

Smith is right that HMRC has long worried that pushing CGT up could end up losing money. The problem isn't the destination, though, it's the journey. With a Budget due on 28 October and speculation already swirling, the damage from uncertainty is happening right now. Healey would do better to decide what he actually believes, do it in one go and then leave the thing alone. Boiling the frog only works if the frog can't read.