So Gordon Brown and Alistair Darling have blinked. Faced by ferocious attacks from assorted business lobbying groups - warning the death of entrepreneurship in Britain is nigh following the latter's attempt in his first Pre-Budget statement to simplify the UK's capital gains tax (CGT) regime - the prime minister and his chancellor have wilted.

Concessions are on the way. The new flat-rate CGT of 18% is not negotiable. Nor is the ending of the Brown wheeze that saw private equity tyros paying just 10% on their (re-engineered) earnings to the exchequer.

However, the Darling package is to be softened for small business owners about to sell their companies and retire. If Treasury signals are to be believed, we could see a return to the system of retirement relief scrapped by Labour in 1998.

Before the 18% tax meter starts ticking, retiring owners of small and medium-sized enterprises could see around £100,000 of their gain exempted from tax. There might even be some relief for sellers of business assets held for a specified number of years.

These rumoured concessions have had a grudging welcome from some tax advisers and business lobbyists. But others are still intent on squeezing a bigger blink out of the Treasury.

"We will have to look at that £100,000, but it is a little detour on the way to what we actually prefer, which is a whole U-turn," the man from the Federation of Small Businesses told the BBC.

That's what happens when you change the fiscal goalposts without warning, trigger a heated backlash from those directly affected, and then try to take the heat out of the issue by offering concessions round the edges. The case for principled reform of the tax system is lost before the debate has even got under way.

Brown, when chancellor, made the initial mistake, when he introduced so-called taper relief and subsequently tinkered with it, in that classically meddlesome Brown way, to encourage more widespread entrepreneurship across the economy.

"Taper relief has no more justification on grounds of efficiency or fairness than would tape worm relief," wrote former independent monetary policy committee member, Professor Willem Buiter, in the Financial Times recently.

When those who set tax rates start chasing after desirable behavioural outcomes by over-complicating their fiscal incentives, they risk creating all sorts of unanticipated anomalies.

Brown's taper relief started out by setting the minimum CGT tax rate at 10%, but only for those who invested in business assets for at least 10 years. But before long he had lowered that time bar for collecting maximum relief to just two years.

By then all sorts of other people, most notoriously City partners in private equity firms, had spotted their chance to minimise their personal tax bills on their earnings. By the simple device of taking the bulk of their personal rewards as so-called carried interest in the portfolios of investments they were managing, they cut their own tax rate from the 40% they would have paid under PAYE to 10%.

When those who set the tax rules over-complicate the sytem into types of income, types of capital, the nature of the ownership, the size of the business, how long each asset is held for, and so on, the opportunities for engineering tax liabilities to minimise the final bill rapidly mushroom.

When the present chancellor decided to sweep away all his predecessor's complexity, as far as capital gains is concerned, and replace it with a single rate, paid on all capital gains, no matter how long assets had been held, he claimed he was doing it in the name of simplicity.

But he sprang that U-turn as a complete fiscal surprise. And by focusing only on capital gains, he left all sorts of other anomalies completely untouched. He was asking for trouble. That was this government's second big mistake.

Buiter argues for much more radical simplification of our tax system. Increasingly income from labour in an advanced economy like ours is a gain from our investment in human capital.

Why should the tax system treat that gain differently from returns to be had from investing financial capital in this class of business asset or that one? "To avoid distortions," argues Buiter, "labour income and all capital income should be taxed in the same way."

A common tax rate across all forms of income is how to maximise fairness and efficiency in the system. There is no case, the professor adds, for a separate corporation tax.

However, it's a fair bet that, with no corporation tax revenue, that common rate would be rather higher than the 18% being proposed by Darling for his simplified CGT regime. Perhaps much nearer the highest marginal rate currently levied on wages and dividends, currently 40%.

But if groups ranging from the CBI, through the Engineering Employers, to the FSB can get themselves into such a lather over whether their members should be left with 82% or 90% of any capital gains they manage to make, how might they respond if the chancellor had taken tax simplification to its logical conclusion and followed Buiter's advice?