"Minister wants supertax on Britain’s top earners"

Writing in the Sunday Times, the Health Minister Ivan Lewis, calls on the government to introduce a new economic package to bail out the hard-pressed middle classes – possibly paid for by new taxes on the rich.

There are two especially odd elements to this appeal.

The first is his definition of the “mainstream majority” of comfortably off voters who swept Labour to power in 1997. They are the families who take two holidays a year, belong to private gyms and eat in restaurants, but struggle to pay soaring bills. Note these are not the rich but those to be helped. Hmm. Sounds like a political ploy to me. Yes, the tax burden has increased for such people but they are all far better off than those who cannot afford even one holiday a year.

The other thing that struck me as odd was the suggestion that new taxes on the 'rich' (or super rich perhaps, depending on your definition) would simply be an increase in INCOME tax. The example given being an extra 10p in the pound tax for earnings above £250,000. According to the report in the paper, the Treasury estimates this would yield £3.5 billion a year, about the same amount as it collects from inheritance tax. I'm rather dubious of this estimate.

What seems to still escape everyone's attention is that in last year's Pre Budget Report the Chancellor CUT Capital Gains tax from 40% to 18%. I have yet to hear any logical or policy reason for allowing anyone who makes short-term speculative gains to pay only 18% tax thereon.

Prior to 6 April 2008 the rate of CGT was determined as if your taxable gains were an additional slice of income. Unless you qualified for any reliefs most gains were taxed at 40%. If you had owned the assets (that you sold at a profit) for more than ten years the rate of tax was reduced to 24%. Now it's 18% for everyone, on all gains, no matter how short a period the assets were owned.

Surprisingly it was Mr Brown who, dare I say it, wisely determined that CGT should be charged at income tax rates in his 1998 Budget. At the same time reliefs were introduced to help investment through encouraging longer-term holding of assets by reducing the effective rate of CGT on longer-held assets. This, we were told was to "stimulate entrepreneurial activity by rewarding longer-term investment in businesses. " As a result, the effective rate of tax on many business assets could be as low as 10% until 6 April 2008. For non business assets the lowest rate of CGT payable by 'the rich' was 24% on assets owned for more than ten years.

No more does the incentive to invest for the longer term exist. Instead we have a system that encourages short-term speculative gains. It also encourages the rich to find ways to convert income (that would be taxed at 40%) into capital gain that are only taxed at 18%.

I wonder how much tax would be generated to help the 'mainstream majority' or those further down the income scale if the basic rate of CGT was still aligned with income tax rates?