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Rachel Reeves is rediscovering the Laffer curve
If you keep raising taxes, at some point, you start to bring in less revenue. Rachel Reeves has shown the way, says Matthew Lynn
Even by the standards of the Treasury, it has turned into a spectacular own goal. Over the past few years, Britain has pushed capital gains tax (CGT) significantly higher. The whole thing started, shamefully, with the last Conservative government, which reduced the tax-free allowance from £12,000 a year to just £3,000.
The system has become punitive under Labour, with the chancellor, Rachel Reeves, in her first Budget, raising the standard rate of CGT from 10% to 18% and the higher rate from 20% to 24% while also increasing the rate paid by entrepreneurs when they sell their business. The left of the Labour party is pushing for an even bigger increase, pressing for CGT rates to be equalised with income tax, which would take the top rate to 45%.
The results are now clear. According to the latest update from HMRC, in 2025 the amount collected from the tax actually fell by 8%, or by £1.3billion. The amount raised by CGT varies more than most taxes, depending on how well the stock market and property prices are doing. You only owe tax when you make a gain, and that doesn’t happen much when the markets have collapsed. Still, the evidence is striking. The higher tax brought in less revenue.
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It’s not hard to work out why. With the allowance at £12,000 it typically made sense to sell an asset when you felt the time was right and most private investors would not end up owing too much tax. With an allowance of just £3,000, many will decide to hold on and avoid triggering extra tax liabilities.
It’s going to get worse this year. The latest revenue figures only reflect the first increase, not the Labour one from October 2024. At rates of 10% and 20% the tax was fairly affordable. If you made a 50% or 100% profit on an investment it is irritating if you have to pay a tenth of that to HMRC, but it is hardly the end of the world – you are still showing a handsome return. Most investors would pay the tax and move on. At 24% plenty are going to decide to hold instead. The result? The revenue raised from the tax will go down even further.
Rachel Reeves’s tax rises are likely to backfire
It is not going to stop there. There are a whole series of tax rises that are about to backfire spectacularly. It looks certain that Britain will raise significantly less from wealthy foreigners with non-dom status now that their tax breaks have ended. Not many of them want to pay punishingly high British taxes on their global assets given that they made their money elsewhere. They are already fleeing in droves to Dubai, Milan or the Caribbean. Far from bringing in an extra £33billion over the next five years, as the Office for Budgetary Responsibility forecast when the change was announced, it is likely to bring in less than ever, especially when all the VAT and council tax those people would have paid is taken into account.
Likewise, it’s starting to look as if the imposition of VAT on school fees will raise less money than forecast, as schools close down and as the government has to pay for the education of those children instead. The huge rises in business rates imposed in the 2025 Budget, a tax that collects £26billion a year for the Treasury, will almost certainly raise less than forecast as pubs and restaurants close down because they can’t afford their tax bills.
Stamp-duty revenue may drop if the fall in house prices in central London, hit by all the non-doms fleeing, spreads to the rest of the country. The rise in national insurance for employers is likely to backfire as companies cut back on staff. Even frozen income-tax thresholds may eventually backfire as people decide it is not worth the hassle working extra hours or taking a promotion if most of the money they might earn is taken from them in tax.
Britain has clearly hit the point on the Laffer curve beyond which higher taxes mean lower revenues. The government already takes 39% of GDP in taxes, one of the highest levels ever. It may well prove impossible to squeeze any more out of the economy. Instead, each rise will backfire, less revenue will be raised, and the government will have to borrow yet more to make up the difference. Capital gains taxis a warning sign of what lies ahead.
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Matthew Lynn is a columnist for Bloomberg and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years.
