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Taxing Capital Gains

Photograph or Arun Advani

Dr Arun Advani

Associate Professor, Economics

Dr Arun Advani's research focuses on issues of inequality, tax compliance and tax design, with a focus on those with high incomes or wealth. Dr Advani is a Commissioner at the Wealth Tax Commission. Dr Advani also works on issues of environmental taxation, economic development, migration, and tax in low- and middle-income countries.

What challenges has this project addressed ?

How to tax high incomes and wealth most fairly is a contentious and topical challenge facing politicians and civil servants in the UK. Increasing taxes on capital gains – a highly contested area of tax policy - is one approach. Capital Gains Tax is a tax on the profit made when someone sells (or ‘disposes of’) something (an ‘asset’) which has increased in value. As capital gains are taxed at a lower rate than income tax, many of the wealthiest individuals are choosing to receive income as capital gains. Although incomes for the wealthiest have stagnated in the past decade, renumeration from capital gains has steadily increased since 2020, supplementing the highest incomes and masking rising inequality in the UK. Further evidence is required in order to effectively design capital gains tax policy and reduce income inequality.

How was this achieved?

A University of Warwick project, supported by the Policy Support Fund, built on existing research on capital gains and policy briefings to develop evidence on designing capital gains tax policy. The project explored and developed evidence on two key questions around the design of capital gains tax policy: firstly, whether members voluntary liquidations (MVLs) (a form of capital gains) should be treated as dividends for tax purposes; secondly, whether raising capital gains tax rates would reduce reinvestments by large amounts.

The project produced evidence on both key questions allowing Dr Advani to develop answers to critical policy questions around capital gains tax and develop a policy brief on reforming the capital gains taxing system. Dr Advani's findings and interpretation have been discussed with politicians and relevant policy leads at HMRC and by the Labour party’s Shadow Treasury team.

Findings were presented at academic conferences in August 2022 and shared with politicians, policymakers, and the media.

Positioning research in a regional and national context

Historically there has been a lack of evidence on this area of taxation. Funding from the policy support fund has allowed Dr Advani to improve the quality of evidence and develop answers to critical policy questions. It has also supported the development of Dr Advani as a leading expert on UK tax policy, with policy makers and national campaign groups now seeking his expertise in this area.

Changes and benefits of the research

It is intended that this work will have a direct effect on taxation policy, with potential for adoption by the Labour Party in their taxation policies. In 2021 the Labour Party announced plans to increase taxation of ‘carried interest’ (a type of capital gain) to align it with the treatment of income. Figures used by the Labour Party were based on Dr Advani’s work and were not previously available.