Governments willing to plug holes in budgets can tax capital or labor. The former is the obvious choice for politicians concerned with the most votes. British Chancellor Jeremy Hunt is therefore considering raising taxes on dividends and capital gainss of shareholders to help plug a £50billion hole in the public purse. Hunt may also increase tax rates on dividends and capital gains. His hope would be to raise a sum of the order of a few billion pounds. From a business perspective, the impact seems minimal. For starters, UK business investment is already the lowest in the G7 and one of the lowest among developed economies. This has been the case since Brexit. If the government imposed a tax on dividends, companies with large UK shareholder bases would simply do a lot more share buybacks instead. However, that would irritate the powerful UK income funds, which favor current yields. The cost of capital – which is already rising with interest rates – for businesses dependent on domestic financing could rise. Again, such levies could further incentivize UK-based equity investors to invest in tax-efficient structures such as ISAs and venture capital trusts. Private business owners who rely on dividends for their income, rather than their wages, are already angry at the proposed measure. But it could spur a double boost to government coffers as the tax rate gap between capital and labor is narrowed. The basic rate of employee income tax is 11 percentage points higher than the levy on dividends, even before national insurance contributions. There can be no assurance that this Tax Proposal will materialize. The fall statement is still two weeks away. But judging by the limited effect of a dividend tax on voters and the investment policies of big corporations, it may well remain. The rift between the pro-wealth policies of Liz Truss and the progressive instincts of successor Rishi Sunak is widening by the day. The Lex team wants to know more about readers. Please let us know what you think of the proposed dividend tax in the comments section below.