‘The birth of capital gains tax’

In 1965, Harold Wilson was Prime Minister of the Labour Government that had been elected on 15 October 1964. Wilson had previously been a lecturer in economics at Oxford University. Jim Callaghan was the Chancellor of the Exchequer. (Interestingly, Callaghan had previously been an inspector of taxes in the Inland Revenue). Callaghan appointed economist Nicholas Kaldor as his Special Adviser.

Throughout the 11 years prior to 1965, Kaldor had advocated ‘integrated taxation’, a coordinated set of taxes that, taken together, required a contribution to the state’s finances out of all an individual’s ‘incomings’. Kaldor had stated his view that taxation of the individual can never be just if it does not include taxing the individual’s gains in his 45,000 word Memorandum of Dissent to the Report of the Royal Commission on the Taxation of Profits, published in 1955.

For Kaldor, it was important for the concept of integrated taxation that capital gains tax was charged at income tax rates. Callaghan chose to go against Kaldor’s advice and imposed a fixed rate, as favoured by Inland Revenue, by The Treasury and by the Bank of England.

Callaghan also followed Inland Revenue advice in placing no upper limit on principal private residence relief. The Labour Party Working Party on Taxation had said that the economy would benefit from it being made easy for workers to move to employment in areas where the economy was expanding but large gains made by wealthy individuals switching houses should be taxed.

It is interesting to note the difference between Callaghan and Wilson in the style of the speeches they made on capital gains before the 1964 general election. Callaghan described the tax he proposed as part of an integrated whole, a concept he took directly from Kaldor. Wilson preferred to describe capital gains tax as ‘another source of revenue’, a phrase used by the Inland Revenue in the leaflet it issued to taxpayers following the enactment of Finance Act 1965. This could have been a difference in commitment to the concept, or it could have been Wilson judging that the public would respond better to the idea that those who make gains should make a contribution out of those gains, without this be presented as part of an all-embracing plan. There had been wide publicity and much adverse press comment, when, in 1953, Charles Clore had made a hostile takeover of Sears. He acquired the company for £4,000,000 and, as soon as he owned it, sold the company’s freeholds for £4,500,000. He paid no tax on the £500,000 ‘profit’, as it was a capital gains and there was no tax on capital gains.

‘We shall tax capital gains’ was in the Labour Party manifesto for the 1964 general election. You may think that means that capital gains tax was an issue that divided the two main political parties. That is not the case. In early January 1956, Anthony Eden’s Conservative Government told the Inland Revenue that, in the following month, the Government proposed to announce a capital gains tax. Inland Revenue responded on 17 January 1956 with a paper against a capital gains tax, saying it would ‘have an adverse effect on savings’ and ‘risk imposing a heavy burden on Inland Revenue staff at the expense of very profitable back duty enquiries’. The Conservative Government accepted Inland Revenue advice and no announcement was made. Nevertheless, some important members of the Conservative Party were in favour of a general tax on capital gains. When appointing him Chancellor, Winston Churchill told Rab Butler that one of his tasks was to look into establishing a capital gains tax. On reading Kaldor’s argument for taxing capital gains, Edward Boyle, Conservative Economic Secretary to the Treasury wrote that he found Kaldor’s arguments for taxing capital gains ‘most convincing’.

Where does that get us now? Retirement relief has come and gone. Indexation relief has come and gone. Taper relief has come and gone. In 1988, Chancellor Nigel Lawson enacted Kaldor’s proposal for taxing gains at income tax rates. In 2007 his Labour successor, Alistair Darling, went back to a fixed rate of tax, in what one MP, Mark Hoban, described as ‘The tax equivalent of a handbrake turn’.

I disagree with Kaldor on one central point. I see capital gains as different from income. Every capital gain made by an individual increases what Irving Fisher called the individual’s ‘stock of wealth’. I suggest we look at taxing all capital gains at the same, low rate of tax. A tax at a rate of four per cent on all gains, including all gains currently exempt, would raise as much revenue as is currently raised at rates of zero per cent, 10 per cent, 18 per cent, 20 per cent and 28 per cent. I suggest we could look to sweep away the five rates and have a single, universal rate in the range of, say, six per cent – eight per cent.

Guest blog by David Collison (CTA (Fellow) and former CIOT Council member)

Notes

You will find David’s fuller exposition on the history, and his further thoughts on a universal low single rate of tax on capital gains in:

• David Collison, ‘The UK Capital Gains Tax – The Conception of the 1965 Act’ in P Harris and D de Cogan, Studies in the History of Tax Law vol 9 (Oxford, Hart Publishing, 2018) 327-363.
• David Collison, ‘1988 And All That: The fundamentals of UK Capital Gains Tax are changed’ in P Harris and D de Cogan, Studies in the History of Tax Law vol 10 (Oxford, Hart Publishing, 2021) 199-226.
• David Collison, ‘Reflections on Capital Gains Tax’ [2021] BTR 253-264.

David will give the next lecture in the History of Tax series of lectures organised by the Worshipful Company of Tax Advisers. 22 February 2022 at 6.00pm. “It’s 1965 and a New Tax is Born - Callaghan, Wilson and Kaldor create Capital Gains Tax” The lecture is open to all interested in taxation, register at https://www.taxadvisers.org.uk/future-events/ (a short cut here).