Capital Gain
By Nl1CHOLAS DAVENPORT Is is very tempting to look at the Stock Exchange annual figures of security values and then say that the enormous capi- tal appreciation shown calls for a capital gains tax. In the financial (boom) year to March, 1960, the rise in company securi- ties was £6,561 million (to a total of £29,149 million) and in the `k_ financial (recession) year to March. 196i. it will probably be around £2,000 million. It only the Chancellor could take even 10 per cent. off that vast sum. how discomfited the Jealous Socialists would feel and how proud most of the capitalists!
But :t is not as simple as all that Why single out the Stock Exchange? Property values appreciate as much as security values—some- times more quickly—and' if you let this incre- ment escape taxation there will be greater speculation than ever in houses, flats and offices, not to mention farms. That seems to me more harmful, socially, than speculation in paper securities. which, after all, encourages the businessman to go to the market for more capital ti spend. But if properties are included, the contents of the properties—all the goods and chattels—must be valued and that would surely cause a breakdown in the Inland Revenue admin- istration as well as a revolt of taxpayers and a nation-wide fiddling of tax returns.
Perhaps Mr. Lloyd is contemplating a capital gains tax exclusively directed at quoted ordinary shares in order to bring speculators bad; into a booming gilt-edged market! If he is, he must think again. He would have to make so many exceptions that the ultimate gain to the Inland Revenue would hardly be worth the administra- tive trouble it would cause. Foremost among the claimants for exception would be foreigners— who wants to discourage foreign investment in the um—charities, trustees, the insurance com- panies with life, annuity and pension funds, and the pension funds administered independently by private corporations and public boards. It is Worth while examining for a moment the amount of money going into insurance and pensicm funds and the proportion invested in ordinary shares.
There has been a great resurgence of personal saving in recent years--from £200 million in 1950 to £1,423 million in 1960. According to the Economic Survey there was a sharp rise last Year in the ratio of personal savings to personal disposable income—from 6 per cent. to over 8 Per cent. These rapidly rising personal savings— the mark of greater wealth, not necessarily greater thrift—are put to work in various ways, but predominantly (if you exclude the surpluses of private businesses) in the form of savings deposits, securities, life and endowment ,assur- ance and claims on pension or annuity funds. 1-_ ast financial year the net deposits in National Sayings amounted to £341 million (covering Mr. Lloyd's over-all deficit), while in the calendar Year the net new savings invested in the life, pension and annuity funds of the insurance com- panies came to £490 million. The independent pension annuity funds must have added about £260 million. So we find a total of £750 million accruing yearly for life assurance and pensions. On the basis of the last published returns of the life offices nearly a third of this total is put annually into ordinary shares say. about £250 million The total life funds of the insurance companies are in excess of £5,500 million, of which about £1,200 million are now invested in ordinary shares. The appreciation on these equities of around £120 million in the last financial year belongs to the life funds and as the insurance companies are assessed for taxa- tion on the profits of their complicated trading, it should not be taxed Now we begin to see how much of the appreciation on quoted ordinary shares would have to be exempt from a capital gains tax. The insurance companies themselves account for about a tenth. And according to the researches of two Cambridge economists—Mr. C H Fein- stein and Mr. J. R. S. Revell—on the ownership of capital about 22 per cent. of equity capital is held by bank nominees (including unit trusts). by overseas residents and by executors and trustees, who should all be able to claim exemp- tion. Another 10' per cent. is held by financial institutions, investment trusts; industrial and commercial companies, who also have a case for exemption. We are left with only about 55 per cent. of the equity capital whose owners would certainly be assessed for capital gain if such a tax were introduced.
I come back, therefore, to the proposition which I recently advanced—that if the Chancel- lor is thinking of laying some tax on capital gain he should avoid the complications of exemption claims and offset losses and allow genuine invest- ment held over a long term to go free.
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