To Answer A Professor Richard J Murphy Question

Not that he'll listen but you might

At risk of harming eyes and ears I direct you to a video by Professor Richard J Murphy. In which he says:

For example, Labor could change the rate of tax charged on capital gains in this country. Capital gains are, of course, almost only earned by people with wealth because they arise on the sale of capital assets, works of art, rented properties, some types of collectible items, but most especially, and I mean most especially, on the sale of financial assets like shares.

Those assets are subject to tax, when they make a profit, at near enough half the rate of tax paid by a person on their ordinary income. If only we charged tax on capital gains at the same rate as income tax - and I beg you to find a good reason why we should not, because I cannot find one, because one pound in your pocket from wherever it comes has the same value to the recipient, whatever its source - if only we charged those capital gains to tax at income tax rates, then Labour could raise money.

So, why aren’t capital gains charged the same rate of tax as income?

Well, the reason Professor Richard J Murphy cannot find a reason against the idea is because he’s entirely ignorant of the basics of the economics of taxation. Which in one sense is entirely fine, no one has to know everything. In someone trying to recommend tax policy it’s less forgivable.

We could start with the usual economics idea - economic that is, not Murphy - that we don’t want to tax capital incomes at all. We like people investing because that’s what makes the future richer. So, why tax what makes our children richer?

This we end up with the Mirrlees Review which points out that we don’t, not really, want to tax the average rate of profit at all. Nor capital incomes. Except that’s not going to fly politically at all. So, the recommendation becomes tax corporations only on their excess, or economic, profits. Profits above that average rate of profit that is (as defined, there, by the BoE base rate or possibly the gilts rate which, to be honest, looks a little low because that is, by definition, risk free).

But of course that is by a bloke who got the Nobel for his study of tax and tax systems and so is near entirely unknown to Professor Richard J Murphy. What he does know of it he disagrees with because, well, Professor Richard J Murphy.

Another attempt at squaring that same circle is the progressive consumption tax. No, not an attempt to charge higher income people a higher VAT rate. Rather, all investment sits inside something like a giant ISA or 401(k). Anything you add into that is tax free. Anything you earn in that is also tax free. Anything you take out of it pays income tax at the normal marginal rate per income band.

So, you earn £100, save nothing that year, earn nothing on whatever savings you have, pay income tax on £100 at whatever the marginal rate is. This is the same for incomes of £1,000, £10,000, £1 million and so on - whatever the marginal income tax rate is for those incomes.

You earn £100 (and so on) and save £20, spend £80, income tax applies to the £80. You earn £100, your past savings earn £20, income tax applies to the £100. You earn £100, you dissave - take out of your ISA - £20, income tax applies to the £120.

We gain the incentive to save, everyone pays income tax - at their marginal rate - on their income that doesn’t go into, or remain in, savings. Probably about the best we can do in balancing that economic desire for savings and investment and also political reality.

Or, a further reason why the CGT rate is different - inflation. Capital gains tend to come over time - and if you’re trading capital assets short term as a business then you pay income tax anyway - and inflation becomes important over time. These past few years we’ve had cumulative inflation of 20 to 30% - why should people be taxed purely on inflation?

We actually did do this back in the 1970s when we had inflation rates of about that each year. Corporate profits were hugely boosted simply because stock in trade went up in value between purchase and sale. But we then taxed those profits from inflation - meaning that companies then didn’t have enough cash to restock at the new and higher prices. Capitalism was eating itself because of the taxation of purely inflationary gains.

Thus we’ve two options for CGT. We could have a lower rate. Or we could equalise the rates but also have an inflation adjustment. Which is what we used to do, that second. Then we brought in the new system - a lower rate but no inflation adjustment. The specific rate chosen was that which collected about the same amount of cash - that was the justification for that lower rate. Swings and roundabouts, roughly, same revenue from equal with indexation and no indexation and lower rate.

Of course, Professor Richard J Murphy has already rejected the idea of indexation. Because, you know, Murphy.

Other people thinking about things and coming to a useful conclusion doesn’t matter when the Galaxy sized brain of the Solanum Tuberosum turns his attention to things.

And finally there’s one that he’s not even thought of to reject.

If you ask Professor Richard J Murphy who pays corporation tax he’ll say the corporation, of course. It is possible to push him a little further and talk about tax incidence. At which point he’ll insist that the people who bear the economic burden are, of course, the shareholders. He’ll insist that this is true ‘till he’s blue in the face too. For it’s one of those horrendous little neoliberal claims that, acshully, the workers also carry some burden of that corporation tax - which is what makes it a bad tax.

So, to be able to insist that the workers don’t, that corporation tax is a very good idea, he has to say that it’s the shareholders who carry that economic burden, that incidence, of corporation tax.

Well, OK. Take him at his word. So, shareholders carry the burden of corporation tax. Which means that to equalise the tax burden on shareholders the taxation of capital gains on shares has to be lower than the income tax rate by whatever that burden of corporation tax is.

No, no, think it through. Corporation tax is really paid by shareholders. Therefore if the capital gains tax on shares is to be equal to the income tax rate the CGT rate - on shares - must be lower than the income tax rate.

We have now proven this using only Professor Richard J Murphy’s own insistences. There is nothing here he can disagree with. Shareholders pay corporation tax therefore equality of taxation of capital gains on shares and income taxes must mean a lower rate on shares to account for the corporation tax burden.

That Professor Richard J Murphy cannot find this reason of his own devising tells us all we need to know about the reasoning of Professor Richard J Murphy.