How risk averse are you?

Glen_Clark

grey_gym_sock wrote: »

if you tax capital lightly (as we do), almost all the benefit goes to wealthy people (most of whom are men, BTW).

Great post. :T The only thing I'm not sure about is your assertion that most of the wealthy people are men. For example I suppose people would count Duncan Bannatyne as the wealthy one. But his ex wife seems to have been the biggest spender and got half when they fell out.
Also since women tend to live longer and marry younger, there are a lot of very wealthy widows.
With the exception of Her Unelected Majesty the Queen, the extremely wealthy tend to be men I agree, because amongst the landed aristocracy inherited wealth traditionally goes to the first son. But they are comparatively few in number.

Glen_Clark

grey_gym_sock wrote: »

the free market won't build social housing, because it isn't profitable enough.

It would if we had a free market in housing, but we don't. The Government interferes in it. Most damagingly by restricting building land supply with the world's most onerous planning system, forcing the price of building land up to a level workers on the basic wage can't afford.
Houses are not expensive - just the land they stand on which is caused by the Government restricting the supply.
Rent is a cost which is draining the productive side of the economy, increasing debt and making it risky to invest in Sterling cash.

BananaRepublic

grey_gym_sock wrote: »

buying shares on a stock market doesn't inject money into the companies, or into the real economy. that's a very different activity from putting money into starting or expanding businesses. the latter is more useful, and should be encouraged.

why do you think taxing money made by investing is "punishment"? when it's taxed much more lightly than money made by actually working. a gain is a gain. a good starting position is to tax all gains at the same rates. then we can consider which kinds of gains should perhaps be treated more favourably.

Not so. If after you bought shares in an IPO, you could not sell them, they would become worthless, and you would not have bought them in the first place. So having a market in shares is an essential part of injecting capital into a company. It also allows for a distribution of control based on share holding. And of course the dividend provides a further incentive to purchase the shares.

bowlhead99

BananaRepublic wrote: »

Not so. If after you bought shares in an IPO, you could not sell them, they would become worthless, and you would not have bought them in the first place. So having a market in shares is an essential part of injecting capital into a company. It also allows for a distribution of control based on share holding.

True. Investor one supports the company by literally providing equity finance to the company. When he sells out, investor two is not directly giving the company money, because he is giving investor one some money instead... but he is taking over the risk of providing the initial capital and retained earnings to the company, rather than have investor one wind up the company and close it down which would be his only other route to getting his money back. By having investor two step in a a substitute owner, the company can continue, which the company would generally consider to be a a good outcome.

Also, let's say a company originally raised money from offering shares at 40p. Today - because the company has grown to have net assets on its balance sheet of 80p per issued share, and it is making annual profits of 10p per share per year:

I am willing to take over ownership of those shares for 100p each because I don't mind paying 10x earnings or 1.25x assets as I am willing to take the risk of earning that much from it in real terms, over future years. But I am of course riskng my hard earned money to do it and it's not like i am just going to work to get a paycheque; i may earn nothing from my investment or i may lose money. I hope that if do earn money from this endeavour I won't be taxed as heavily as if I had gone for the guaranteed cheque.

When i pay my 100p, the company doesn't get another 60p on top of what it had already collected from the first round investors, but can continue running its business with 80p of assets as a going concern rather than be put into liquidation. A Good Thing for the business and its employees.

Also, as my activity on the stock market has set a market price for transactions in the company shares of about a pound each, when the company *does* want to raise more money it is quite likely to be able to do that at 99p now rather than 40p earlier, which is great for the company and its owners because they don't have to seek more expensive capital elsewhere to keep the company afloat or growing.

talexuser

BananaRepublic wrote: »

I have a problem with the idea of CGT.

Interesting idea, maybe it comes down to most productive use of money? If you get savings from a building soc or bank you are (supposed to be) helping other people buy houses or run/grow businesses. Buying a vase doesn't do that much for the economy in comparison, and any gains maybe just a matter of luck.... or you risk lots of people chasing vases to the point of building bubbles that will eventually burst, if the sole point is to buy and sell limited supply vases at a good untaxed profit. So the profits from capital gains are taxed to encourage other uses of the money, eg sell and re-circulate shares to keep companies going?
Anyway, we've just had a reduction in CTG

Glen_Clark

I don't think anyone likes paying tax. But since you have to pay tax, surely the least inconvenient time to pay it is when you are dead and don't need it anymore (inheritance tax)

chucknorris

grey_gym_sock wrote: »

what we have in the UK is lower tax rates for all unearned income (including capital gains)

Capital gains tax at 28% can and often is ridiculously high, because the 'taxable gains' are not necessarily actual real term gains, if inflation is taken into account. It would be much fairer to tax capital gains at the same rate as income tax, but allow an indexation allowance (that old system was far fairer).

For example if someone invested £1m in an asset (or assets), and over a period of 10 years their asset had increased by 30% (after deducting acquisition costs), they would have a taxable gain of £288.9k(allowing for their £11.1k capital gains tax allowance), which would be taxed at 28% = a tax bill of over £80k.

But if inflation had averaged say 2.5% per annum during that period, compounded that would be 28% in total. Therefore the true gain taking inflation into account would only be £15,625 (calculated by (£1.3m x (1/1.28)) - £1m), yet they would be paying far more in tax, than the actual real term gain.

bigadaj

chucknorris wrote: »

Capital gains tax at 28% can and often is ridiculously high, because the 'taxable gains' are not necessarily actual real term gains, if inflation is taken into account. It would be much fairer to tax capital gains at the same rate as income tax, but allow an indexation allowance (that old system was far fairer).

For example if someone invested £1m in an asset (or assets), and over a period of 10 years their asset had increased by 30% (after deducting acquisition costs), they would have a taxable gain of £288.9k(allowing for their £11.1k capital gains tax allowance), which would be taxed at 28% = a tax bill of over £80k.

But if inflation had averaged say 2.5% per annum during that period, compounded that would be 28% in total. Therefore the true gain taking inflation into account would only be £15,625 (calculated by (£1.3m x (1/1.28)) - £1m), yet they would be paying far more in tax, than the actual real term gain.

Well that was the old system and made more sense in many ways. Though it is more complicated than a simple percentage of x minus y calculation.

So long as you know the system then you can plan appropriately, the real problem is how often and much the goal posts change, partly a consequence of the adversarial electoral system we adopt but also changing fashions and views in an attempt to curry favour with the media and look good in opinion polls.

bowlhead99

Yes, the old system had an indexation allowance using published tables, so the longer you had something the less the gain would be valued at. That got abolished for individuals from '98 in favour of a simplified system of taper relief where the gain counted for less the longer you'd had it (with faster taper for certain types of assets).

I have my suspicions that they only brought in the new regulations at that point because they saw I was in the process of training to be an accountant and really wanted to screw me over by making me learn two distinct systems for my tax exams....

Then quite a long time later once my exams were long behind me, they made it even simpler by getting rid of taper and simply dropping the CGT rates to 28%/18% to avoid more complex calcs but still ensure you could pay less on gains than ordinary income. Now they've dropped them further but with some tweaks to what can count as a gain (e.g. new rules around investment managers "carried interest" returns).

Other places like USA still differentiate between short term and long term gain but keep it very simple so it's either short term at ordinary income rate or long term at a preferential rate, rather than having taper bands or a halfway-house rate on everything.

chucknorris

bowlhead99 wrote: »

Yes, the old system had an indexation allowance using published tables, so the longer you had something the less the gain would be valued at. That got abolished for individuals from '98 in favour of a simplified system of taper relief where the gain counted for less the longer you'd had it (with faster taper for certain types of assets).

I have my suspicions that they only brought in the new regulations at that point because they saw I was in the process of training to be an accountant and really wanted to screw me over by making me learn two distinct systems for my tax exams....

Then quite a long time later once my exams were long behind me, they made it even simpler by getting rid of taper and simply dropping the CGT rates to 28%/18% to avoid more complex calcs but still ensure you could pay less on gains than ordinary income. Now they've dropped them further but with some tweaks to what can count as a gain (e.g. new rules around investment managers "carried interest" returns).

Other places like USA still differentiate between short term and long term gain but keep it very simple so it's either short term at ordinary income rate or long term at a preferential rate, rather than having taper bands or a halfway-house rate on everything.

I'm afraid that I must be far more suspicious and cynical than you, I didn't think that it was that complicated, I think the 'simplification' explanation was just an excuse to collect more tax.