That the Government has been willing to think again on capital gains tax (CGT) is very welcome news. The proposals in the recent Pre-Budget Report were some of the most premature delivered by a chancellor in recent times. The briefest of discussions with business would have shown that a move that was supposedly aimed at increasing the tax paid by private equity firms was more likely to hit entrepreneurs running small businesses. Given that those entrepreneurs are the engine of the economy, Alistair Darling's words betrayed an alarmingly obtuse approach to wealth creation.

The outrage from the CBI and other business groups seem to have taken the Treasury by surprise. That in itself is a worrying indication of how insulated from the real world our public servants have become. But at least the Chancellor has been wise enough to listen, and by implication to acknowledge the unintended consequences of his actions if they were to become part of the Finance Bill.

These consequences include handing stock speculators and buy-to-let investors a tax cut from 40 per cent to 18 per cent, something that was clearly not his intention.

That said, the Government has not promised to scrap the proposal outright. It does not have that luxury, given Mr Darling's other central promise — to raise the inheritance tax threshold. The Conservatives' pledge of a more drastic cut in inheritance tax makes it politically impossible for Gordon Brown to retreat. The changes to inheritance tax are expected to cost the Treasury around £1.2 billion. Sufficient revenue must still be raised to meet that cost. Unlike the Opposition, the Government must balance the Budget.

The irony is that the more that chancellors try to target particular groups, the greater is the likelihood that they will draw others into their net without meaning to. The taper relief on capital gains tax was never designed to give a tax break to private equity firms in the first place. Trying to reduce that tax break is now fraught with difficulties.

The Chancellor continues to state that the main purpose of his CGT proposals was simplification. While this newspaper is very much in favour of simplifyng the tax regime, this should not come at the cost of entrepreneurial vigour. The truth is that these crude changes looked more like a raise-revenue-quick wheeze for the Treasury to fund a politically motivated change in inheritance tax, by slugging get-rich-quick merchants. These changes are a simplification at one level, but they also penalise risk-taking and enterprise.

Whatever the Chancellor now intends, he should move as quickly as he can to clarify it. There are already signs of an unseemly scramble to reap the benefits of the lower rate before the changes come into force next year. That is a distortion of the market that is unnecessary and undesirable.

Inevitably and inexorably, the Government must cut taxes if it is to remain the Government — OECD figures show that government spending as a percentage of GDP will rise from 37.5 per cent in 2000 to 45.1 per cent in 2008. The CGT proposal must be reviewed, the overall tax take must be reduced and the role of business in society must be respected.