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What is the main topic discussed in this episode?
Hello and welcome to More or Less.
We're your weekly guide to the numbers in the budget, the US election campaign and your local bear-infested forest. And I'm Tim Harford. This week, was an MP wrong about the number of people who pay capital gains tax? Why does the Bank of England try to ensure inflation is 2%? Why not zero? Donald Trump says US crime figures are fake. Are they? We fact-check a claim about the prevalence of suicide among GPs. And with the help of an expert, we comb through piles of bear excrement. And where on earth would you find that?
Well, the simple answer would be in the woods.
Let's start with capital gains. Earlier this month, the Conservative MP Andrew Mitchell was on Radio 4's Any Questions. And with the budget just a few weeks away, revenue-raising taxes were a hot topic. One of the taxes under discussion was capital gains tax. This is a tax that's paid on the increase of a value of an asset when you sell it, maybe a second home, maybe a company that you've built up as an entrepreneur and decided to sell. There are many rates for this tax, depending on your income and on the asset you're selling, but all of them are lower than the rates for income tax, and there's long been criticism of this disparity. But Andrew Mitchell didn't think that raising capital gains tax was a very good idea.
Only about 12,000 people pay capital gains tax, but these are huge entrepreneurs and business getters. I think you've got to be very careful that you don't destabilise the market and then get negative effects.
Only 12,000 people pay capital gains tax?
Loyal listener Edward Leatham was surprised. Surely that can't be right. I have paid capital gains tax in the past and I am by no means a millionaire. So if I pay capital gains tax, then there must be millions who also pay it.
So is Edward onto something? We asked Dr Aaron Advani, Director of the Centre for Analysis of Taxation and a research fellow at the Institute for Fiscal Studies. He's recently co-authored an IFS report on reforming capital gains tax.
They are right to be suspicious. It's more like 350,000 to 400,000 in any given year. So last year, it was about 370,000. Wow. That's a big error.
It's quite a lot more.
Yeah. I think probably what Andrew Mitchell was identifying is something that is actually an unusual feature of capital gains tax, which is that it is absurdly concentrated.
Meaning that a small number of people pay most of the tax.
Yes. And so he was probably remembering the statistic that 12,000 people pay something like two-thirds of the tax. And that was probably what he had in his mind and didn't remember that, well, there are quite a lot of other people who are paying some tax. It's just a much lower level of the capital gains tax.
Capital gains tax isn't currently a massive revenue raiser for the Treasury. It only raises about £15 billion a year, less than 2% of the total tax take. But could you get more out of it? What would happen if the government just raised capital gains tax rates?
So HMRC's numbers are that if you were to increase the top rate of capital gains tax by 10 percentage points, so the top rate is currently mostly 20%, although there's a few other rates. If you increase that by 10 percentage points, it's almost a 50% increase.
How many people actually pay UK capital gains tax — was the MP's '12,000' claim accurate?
You would think on a base of £14 billion, that should add £7 billion. But actually, they forecast that within a couple of years, you're actually losing £2 billion.
We increase the rate but end up losing money. How come?
Capital gains tax is paid specifically when you choose to sell the asset that you own. And the thing about that is that you can choose when you sell. So you don't have to sell today or tomorrow. You could choose to hang on to something longer. You could even hang on to it and then leave the country and it'll be completely out of capital gains tax because you can sell after you leave and then we don't charge you, which is unusual because most countries would charge you on the capital gain you'd built up over the time you'd been. But we don't do that.
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Chapters
5 chapters
1
What is the main topic discussed in this episode?
0:00–3:30
2
How many people actually pay UK capital gains tax — was the MP's '12,000' claim accurate?
3:30–11:50
3
Why is capital gains tax so concentrated among a small number of taxpayers?
11:50–14:53
4
How would raising capital gains rates affect government revenue and behaviour?
14:53–22:03
5
What comprehensive reforms could plug loopholes in the UK's capital gains tax?
22:03–28:15