Government faces internal dissent over tax hike plan

LONDON Thu May 27, 2010 1:23pm BST

Prime Minister David Cameron speaks during a news conference after talks with German Chancellor Angela Merkel at the Chancellery in Berlin May 21, 2010. REUTERS/Thomas Peter

Prime Minister David Cameron speaks during a news conference after talks with German Chancellor Angela Merkel at the Chancellery in Berlin May 21, 2010.

Credit: Reuters/Thomas Peter

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LONDON (Reuters) - Prime Minister David Cameron said on Thursday there was an international consensus on the need for urgent deficit cuts, but faced dissent from within his own party over plans to raise taxes on asset sales.

Cameron also called for a resumption of world trade talks to boost the global economy.

"There is now an international consensus that dealing with our budget deficits is vitally important. If you look at the threats to the euro zone and the threats to our economies around the world, excessive budget deficits are a big part of the problem," he told BBC Radio.

Cameron's coalition outlined this week 6.2 billion pounds of spending cuts this year. Further action to tackle a deficit running at 11 percent of GDP -- close to that of Greece in percentage terms -- is expected in an emergency budget on June 22.

However, senior lawmakers from Cameron's party are unhappy at plans to hike capital gains tax to bring it close to income tax rates, a policy promoted by the Lib Dems.

CONSERVATIVE BACKLASH

The rise in the tax, levied on items such as the sale of shares and second homes, is aimed partly at stopping some companies and individuals classifying revenue as capital gains, hence avoiding paying the higher income tax rate.

The issue has become a focal point for Conservatives aghast at some of the policy compromises that have been needed to form a coalition and could represent a first potential fissure in an administration Cameron says is built to last for five years.

Signs of fragility will likely be taken badly by financial markets eager to test the coalition's resolve to cut debt.

"One of the funny things about capital gains tax - you see it here, in America and in Australia - is that when you put up the rate, very often the revenue goes down," influential Conservative parliamentarian David Davis told BBC Radio.

Davis said the rich could sell assets quickly before any tax hike took effect, but an increase would punish the elderly who count on gains from second homes or shares in later life.

He proposed a taper system whereby the tax was applied at a rate of 40-50 percent for assets sold within a year, but falling to zero over five years, a move he said would discourage switching income to capital and encourage long-term investment.

Senior Conservative John Redwood said a rise in capital gains tax to as much as 50 percent would be "penal."

"There are lots of countries that have zero capital gains. We need to attract rich and successful companies and people here," he told the BBC.

Thinktank and free market advocate the Institute of Economic Affairs said the rise in tax on assets would "raise little revenue and cause a great deal of economic harm."

80/20

Cameron trod carefully ahead of next month's budget.

"We have to raise some modest amounts of revenue in order to raise the income tax threshold which we think will help particularly low-paid people," he said.

All arguments would be "taken carefully into consideration before the budget decisions are announced."

On deficit reduction, Cameron described an 80/20 ratio between spending cuts and tax rises as the "gold standard."

There has been speculation the government might increase value-added tax to 20 percent from 17.5 percent in the budget.

Retailers warned the government on Thursday that raising VAT could lead to the loss of 163,000 jobs over the next four years and cut spending by 3.6 billion pounds.

Cameron said the successful conclusion of world trade talks would be a cost-free route to economic growth.

"We should be pushing much harder on getting the (WTO) Doha Trade Round going again," he said.

(Additional reporting by Fiona Shaikh, Kylie MacLellan and Mohammed Abbas; editing by Mike Peacock, Jason Webb, Stonestreet)

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