Labour forced to ditch 'bat s**t crazy' wealth tax plan after Treasury officials warn Chancellor it would backfire and cost the government billions

John Healey has ditched Budget plans for a ‘wealth tax’ on investments after officials warned it would backfire.

The Chancellor has been examining Labour demands to raise rates of capital gains tax (CGT) to the same level as income tax.

The move would have seen CGT for top rate taxpayers almost double from 24 per cent to 45 per cent.

Supporters of the idea, including cabinet ministers and union chiefs, claimed the plan was a painless way to raise billions by soaking the rich.

Defence secretary Wes Streeting described the idea as a ‘wealth tax that works’.

But Treasury officials warned Mr Healey that a sharp rise in CGT would backfire disastrously.

They pointed to official figures showing that a big rise in the headline rate would cost the Treasury billions as investors took action to avoid paying the tax altogether.

According to HM Revenue and Customs estimates, a 10-point hike in the higher rate of CGT would lead to a loss in revenue of more than £3.5 billion a year.

Officials also raised concerns that a big increase in CGT could trigger a slump in investment at the very time ministers are trying to encourage it.

One Treasury insider told the Daily Mail: ‘Superficially it sounds like an easy win. But the reason Rachel (Reeves) never touched it is because the numbers just don’t add up.’

Another Treasury source told the Financial Times the idea was ‘bat s**t crazy’.

The decision to drop the plan follows another climbdown over the Mansion Tax, where Mr Healey has backed away from cutting the threshold from £2 million to £1.5 million.

Shadow chancellor Andrew Griffith said: ‘John Healey is in headlong retreat. But his Treasury kite flying has damaging consequences for economic confidence impacting ordinary people’s jobs.

‘Whilst u-turns on individual measures such as CGT hikes are welcome, with the tax burden at a record high the Chancellor needs to rule out any tax increases and instead get a grip on the out-of-control welfare bill.’

Capital gains tax is paid on the profits from selling assets like property, shares and possessions.

Basic rate taxpayers pay CGT at 18 per cent, while higher rate taxpayers pay 24 per cent.

Left-wingers have long complained it is unfair that wealth is taxed more lightly than work.

Louise Haigh, who is effectively Andy Burnham’s deputy, said this summer that income tax and CGT rates should be ‘brought closer’, adding: ‘This reform is central to restoring confidence that the system does not favour those able to structure their income over those earning through work.’

Unite union chief Sharon Graham backed the measure last month, alongside a one per cent ‘wealth tax’ on assets.

Former Labour leader Neil Kinnock also called on the Chancellor to act, saying a ‘fair change’ on CGT could raise as much as £12 billion.

But experts have repeatedly questioned how much, if anything, a big rise in CGT would generate.

HMRC warned that ‘very large tax rate rises can reduce exchequer yield due to taxpayer behavioural impacts’. It warned that even a 5p rise in the top rate of CGT could cost the Treasury £870 million a year.

Mr Healey could still impose a more modest rise in CGT rates next month.

But HMRC figures suggest that even a one per cent rise would cost the Treasury £30 million in lost revenue.

Former Tory chancellor Sir Jeremy Hunt said there was little scope for raising additional revenue.

He said equalising the rate was ‘always a non-starter’, telling the FT: ‘Every chancellor is briefed that the revenue-maximising rate of CGT is 24 per cent after which you start losing money’.