John Redwood: We should not be penalising our savings culture

I also appreciate the coalition's need for more revenues overall. The Government has said it wishes to assist a substantial private sector led revival, and wants to see the enterprise sector create more jobs and homes for rent. The Government needs a policy which allows

reasonable freedom for people to invest, encourages those who are responsible and who make provision for their families and their futures, and is fair.

I suggest that they tax gains of under one year as income. I would suggest the tax be set at 40 per cent for higher rate payers, as I understand the 50 per cent rate is a temporary measure. Were they to use the 50 per cent rate, it would need to be clear that they intend to go back to 40per cent for both income and capital gains as soon as possible.

There is some suggestion that longer term gains should also be taxed at 40 per cent with reliefs for business assets. This would deal with one of the more damaging features of a high CGT rate regime, allowing entrepreneurs to set up and grow businesses which they can subsequently sell without paying a penalty rate.

However, it would leave long- term savers, people owning buy-to-let properties, and people with savings for retirement which are not held within a pension fund having to pay substantial tax. This would include paying tax on inflation. Under previous CGT regimes, people were

allowed to deduct the inflationary element of the gain from the taxable amount. This indexation allowance was removed in return for a much lower overall rate. It would be unfair to ignore this in a new scheme.

A big increase in the overall rate could well damage the revenue. The US and UK have both shown in the past that raising CGT rates cuts revenue.

In the case of the US, where the figures are not affected by other changes to the tax base, the figures are dramatic. In 1981, the US collected $28.5bn with a tax rate of 24 per cent. In 1982, they raised $26.95bn with a lower 20 per cent rate, only to see receipts soar to $37.85bn the next year and as high as $97.33bn in 1986.

In 1987, they raised the rate to 28 per cent. Revenue plunged to

$59.83bn. They raised it again to 33 per cent. Revenue briefly rose to $66.23bn in 1988 then plunged again to $57.3bn, lower than when the rate was 28 per cent and well below the levels when they had a 20 per cent rate.

In 2002, they raised $55bn with a 20 per cent rate. In 2004, this

soared to $78bn by lowering the rate to 15 per cent. In 2006, they were bringing in $110bn at the 15 per cent rate.

I, therefore, suggest that longer term gains should be taxed at lower rates. If you taxed two-year gains at 30 per cent, and three- year gains at 20 per cent, higher rates than the current one, you could tax gains of four years or more at 10 per cent. This should increase the total revenues from CGT by the second year, and offer a stimulus to longer term investment. I would go further and offer no capital gains after five years, to send a strong signal to the world's investors that the UK is back in business as a favourable location.

The Prime Minister has said he wants to create an energetic

enterprising UK. He is right to stress just how many new businesses we need, how many older businesses have to grow, how many more jobs we require, how much more investment we need to encourage. We also need more homes, at a time when the public sector will have very little money to pay for them.

There is nothing wrong with individuals as well as companies building and renting out houses for others.

Many of the people who face capital gains tax bills are not rich. They have some shares or a second property, which they have put aside for their old age.

The new Government says it stands for freedom and responsibility. Indeed, the two go together. It is important that those who are prepared to pay their own way are given reasonable freedom to save and invest.

A more entrepreneurial Britain would be so welcome. Its time has come. It needs a competitive tax structure. People who save, invest and set up businesses need encouragement, not higher taxes.

Governments raise taxes on cigarettes to stop people smoking, on petrol to cut down people's driving. Surely we should not be increasing taxes on saving and investing, at a time when we need more of both?

John Redwood is a former Cabinet minister and backbench Tory MP.