Frank O'Donnell

The Pre-Budget report has this week suggested that taxes are likely to rise. With the public deficit climbing towards the £200 billion mark, the chancellor Alistair Darling has little choice.

A general election is less than six months away and the government must tighten its fiscal belt, to reassure bond markets and voters that the UK economy isn’t escalating out of control.

Already we have seen Labour floating the idea of a windfall tax on bankers’ bonuses, while changes to inheritance tax and pension tax relief are also being widely touted.

The other option is the government moves to close the gap between income tax and capital gains tax by increasing the latter from its current 18%.

Why, they argue, should some pay tax of just 18% on their investments while others incur a rate of up to 50% on their hard-earned income? This difference encourages firms to pay their best staff in shares rather than income, as a neat way of avoiding higher income tax.

It is argued that increasing CGT towards income tax levels, this would close this tax loophole.

Those positive for the change believe the current regime rightly encourages entrepreneurial activity and investment, and that any increase would discourage exactly the kind of activity the UK needs to recover from the crisis.

Besides, they say, much of the difference on long-term investments can be accounted for inflation– that is one reason why long term investment income should not be treated the same as immediate income.

Entrepreneurs and long term investors should not be treated the same as short-term traders and speculators, they add.