Things are looking up for New York: Not only does it appear Congress is backing off legislation to raise taxes that would hit the city’s private equity industry, but now London has announced plans to do just that.

Yesterday, Prime Minister Brown’s administration announced it would introduce an 18% capital gains tax and do away with the tiered system that allows private equity firms to pay only 10% tax on profits from shares of companies held for at least two years.

The news was met with immediate disdain in British financial circles, where the current tax structure is lax compared with the capital gains taxes that private equity firms face in New York.

The head of the tax division in Britain for Ernst & Young, Paul Davies, said the proposals “threaten to undermine the entrepreneur culture that has blossomed in the last decade.”

“Complete abolition of the taper removes a large incentive for entrepreneurs and challenges the ‘Dragon’s Den’ success of the U.K.,” Mr. Davies was quoted as saying by several news organizations yesterday.

The British tax hike plan comes at a sensitive time in global finance and coincides with news that the Democrats in Congress may forgo attempts this year to increase the capital gains tax on private equity and hedge fund managers in America to 35% from the 15% now on the books.

It was also coupled with the announcement that Mr. Gordon wants to consider closing a tax loophole that allows foreigners to live in Britain without paying taxes on their overseas income. That loophole, a contrast to America — where residents are taxed on income no matter where in the world it is earned — was highlighted last week in an article on the front page of the Wall Street Journal under the headline “Capital Gains: Behind London’s Boom, Billionaires from Abroad.”

With New York and London locked in an intense competition to lure businesses, those who follow the private equity business say any change in the tax code of an international city could shift the pieces of the fiscal chessboard.

“Anything that arguably makes London a less attractive place to do private equity deals or anything else benefits New York because we are in direct competition,” a partner at McDermott Will & Emory, Peter Faber, said in a telephone interview.

“If you are considering a number of different transactions, one here and one there, and the profit potential is reduced by the tax bite that is something you are going to take into account,” Mr. Faber, who specializes in corporate taxation, said. “It’s not the only thing, but it’s a major component of your analysis.”

The chancellor of the Exchequer, Alistair Darling, announced the latest tax proposals at the House of Commons yesterday as part of the government’s pre-budget report. The pledge was widely viewed as a response to pressure from the Labour Party and from unions that have been arguing it is unfair for wealthy private equity executives to pay a fraction of what working-class Britons pay on their income.

“It’s right that everyone who lives and works here should pay their fair share,” Mr. Darling said, according to news reports. “Taken together with the tax loopholes that I am closing, will ensure that those working in private equity pay a fairer share.”

Tory leaders and those in the finance industry, however, said the move could suppress investment in London, which has seen an economic boost from the flurry of investment in the last few years.

The president of Manhattan-based Aurelian Management, Brian Horey, told The New York Sun that the British plan would make companies “think twice about locating to London or further investing in London.”

“It will make them sharpen their pencils and say, ‘Okay, if that is going to be the new scheme of taxation, how does that compare to other places and are we as eager about locating there as we were before?'” Mr. Horey, whose company specializes in investment advisory services, said.

Others in the private equity industry who did not want to be named noted that America still has its own prohibitive tax issues to deal with. They also said that just because Congress seems poised to delay action on tax hikes on capital gains now does not mean it won’t press ahead next year.

Mr. Horey was not convinced that New York would be the beneficiary if private equity firms or hedge funds start fleeing London. He said they could simply find other locations with lower tax burdens.

“It removes some of the disadvantage that New York has,” he said. “Whether those people will choose to locate here or go somewhere else where they are more lightly taxed is kind of the next question. My guess is at least some of them will go to a place where they will not be taxed as heavily.”