The Laffer curve is being rediscovered by Rachel Reeves

At some point, tax revenue starts to decline if you continue to raise taxes

James Mackreides claims that Rachel Reeves has led the way.

It has become an incredible own goal, even by Treasury standards. Britain has raised the capital gains tax (CGT) considerably in recent years. The previous Conservative government, which cut the tax-free allowance from £12,000 to just £3,000 annually, was the shameful beginning of it all.

Under Labour, the system has become punitive. In her first Budget, Chancellor Rachel Reeves increased the standard rate of CGT from 10% to 18% and the higher rate from 20% to 24%. She also increased the rate that entrepreneurs pay when they sell their businesses. The Labour party's left is advocating for an even greater increase, calling for income tax and CGT rates to be equalized, raising the top rate to 45%.

The outcomes are now evident. According to HMRC's most recent report, the tax revenue actually decreased by 1.3 billion, or 8%, in 2025. More than most taxes, the amount collected by CGT fluctuates based on the state of the stock market and real estate prices. Only when you make a profit do you owe taxes, and that doesn't happen very often when markets are collapsing. Nevertheless, the evidence is compelling. The revenue from the higher tax was reduced.

It's easy to figure out why. With the 12,000 allowance, it usually made sense to sell an asset when you thought the time was right, and most private investors wouldn't have to pay a lot of taxes. Many will choose to wait and avoid incurring additional tax obligations with a mere 3,000 allowance.

It will worsen this year. The most recent revenue figures do not include the Labour increase from October 2024; they only show the initial increase. The tax was reasonably priced at rates of 10% and 20%. It is annoying if you have to pay HMRC a tenth of your 50% or 100% profit on an investment, but it is still a good return. The majority of investors would pay the tax and go on. At twenty-four percent, many will choose to hold. As a result, tax revenue will decline even more.

Tax increases for Rachel Reevess will probably backfire.

That is not where it will end. A number of tax increases are on the verge of having a disastrous negative impact. Since wealthy foreigners with non-dom status are no longer eligible for tax breaks, it appears certain that Britain will collect much less from them. Since they earned their money elsewhere, many of them do not want to pay the exorbitant British taxes on their worldwide assets. Already, large numbers of them are escaping to the Caribbean, Dubai, or Milan. The Office for Budgetary Responsibility predicted that the change would bring in an additional £33 billion over the next five years, but when all the VAT and council tax that those individuals would have paid is taken into account, it is likely to bring in less than ever.

Similarly, it appears that the VAT on school fees will not generate as much revenue as anticipated because schools are closing and the government will have to cover the children's education. The 2025 Budget's massive increases in business ratesa tax that brings in £26 billion annually for the Treasurywill most likely result in lower revenue than anticipated as eateries and bars close because they can't pay their taxes.

If the decline in house prices in central London caused by all the non-doms escaping spreads to the rest of the nation, stamp-duty revenue may decrease. The increase in national insurance for employers is probably going to backfire as businesses reduce their workforce. Even income-tax thresholds that are frozen may eventually backfire as people decide it is not worth the trouble to put in more hours or accept a promotion if the majority of their potential earnings are deducted for taxes.

It is obvious that Britain has reached the Laffer curve point where higher taxes result in lower revenues. Currently, the government collects taxes at one of the highest rates ever39% of GDP. It might not be possible to extract anything more from the economy. Rather, every increase will backfire, resulting in lower revenue and the need for the government to borrow more money to make up the shortfall. Capital gains taxes are a precursor to future developments.