There is a certain kind of arithmetic that only seems to work in the mind of a Labour politician: raise the rate, and the revenue must follow. Tax the rich a little harder, and the coffers swell a little fuller. It is a comforting story. However, it is also, according to the Treasury’s own modelling, wrong — and Rachel Reeves’s successors are about to find that out the hard way.
What the numbers actually say
Reporting in The Telegraph today laid bare an uncomfortable truth for the Labour Government. Internal Treasury figures, released to the Conservatives under a Freedom of Information request, indicate that receipts from Capital Gains Tax do not simply rise in lockstep with the rate charged. Instead, officials assume that every 1 percentage point reduction in what an investor keeps from selling an asset produces a 3.6 per cent fall in the pool of gains available to be taxed in the first place.
Run that assumption forward, and the Conservatives calculate that CGT revenue peaks at a rate of roughly 21.7 per cent. Reeves took the top rate to 24 per cent. Every point beyond that peak, on the Treasury’s own logic, is not squeezing more out of the wealthy, it is squeezing less.
This is not a fringe theory dreamed up by a think tank with an axe to grind. It is, by the Telegraph’s account, the Government’s own internal thinking, produced before Labour’s first Budget. The Tories did not invent the tipping point. They simply asked to see it.
A curve as old as tax itself
The economic principle at stake here has a name, and it is not a new one. The Laffer Curve (sketched, according to popular legend, on a napkin by the economist Arthur Laffer in the 1970s) makes a point so simple it borders on the obvious: at a tax rate of zero per cent, the government raises nothing, because there is no tax. At a rate of 100 per cent, the government also raises nothing, because nobody bothers to work, invest, or sell an asset if the state confiscates the entire gain. Somewhere between those two extremes sits a rate that maximises revenue. Push past it, and higher rates start bringing in less money, not more, because people change their behaviour to avoid the tax rather than simply paying it.
With Capital Gains Tax, that behavioural response is especially sharp, because, unlike income tax on a monthly salary, a gain is only taxed when an asset is actually sold. Nobody is forced to sell a business, a portfolio of shares, or a second home on any particular date. Anna Leach, chief economist at the Institute of Directors, made this point plainly, noting that CGT receipts are especially sensitive to timing because investors largely control when they choose to realise a gain. Push the rate high enough, and the rational response is simply to wait, to hold, or to sell somewhere else entirely.
We saw a preview of exactly this dynamic in the HMRC data released alongside the Telegraph’s report: a rush of asset sales ahead of Reeves’s 2024 Budget saw CGT receipts nearly double, from £12.8 billion to £24.2 billion, in a single year. That was not a triumph of tax policy. It was investors racing for the exit before the door closed, which means, by definition, that fewer assets are left to tax in the years that follow.
The Laffer Curve isn’t right-wing ideology — it’s arithmetic
It is worth being precise about what the Laffer Curve does and does not claim, because Labour’s defenders like to caricature it as a Reaganite fantasy that “tax cuts pay for themselves.” It does not say that. It says only that revenue is a curve, not a straight line — that there exists some rate beyond which further increases become self-defeating. Even the Institute for Fiscal Studies, hardly a nest of free-market zealots, does not dispute the shape of the curve. Stuart Adam of the IFS is reported to have accepted that the Treasury’s own figures place CGT above the revenue-maximising rate, while cautioning that the precise knock-on effects for other taxes are harder to pin down.
That is a fair and honest caveat. It is also, notably, not a defence of raising the rate further. It is an argument for smarter design — closing loopholes, taxing gains at death, deterring flight abroad, rather than Andy Burnham’s blunter instinct to simply keep turning the dial.
A Chancellor’s dilemma, self-inflicted
And turn it they might. Louise Haigh, a close ally of Burnham, is reportedly among those pushing for a fresh rise, backed by sympathetic noises from the Institute for Public Policy Research. Burnham himself has taken to declaring that Britain has “overtaxed labour and undertaxed wealth”, a soundbite built for a conference hall, not for a Treasury spreadsheet.
Even the Prime Minister appears to sense the danger. He has told the Financial Times that Britain needs its wealth creators to stay, not flee, and has ruled out taxing the wealthy out of the country. It is a rare flicker of economic realism from a Government that otherwise seems allergic to the idea that people — even rich people, even hated “landlords” and “investors”, respond to incentives.
Sir Mel Stride, the shadow chancellor, put the political charge sheet bluntly: Labour has already raised CGT beyond the Treasury’s own revenue-maximising point, and much of the Cabinet wants to go further still.
The bill for ideology
Britain’s tax burden is already forecast to climb to its highest level since the Second World War, with revenues on course to exceed 38 per cent of GDP by the decade’s end. Even the International Monetary Fund, no one’s idea of a Tory front group, has warned that another raid on top earners risks costing the Treasury money rather than raising it.
None of this means taxes on wealth should never rise, or that the system is beyond reform. The Centre for the Analysis of Taxation has floated a package, taxing gains at death, an exit levy for those departing the country, more generous treatment of losses, that its authors reckon could raise some £14 billion a year without simply chasing the rate ever higher.
But that requires the patience to design a better tax, rather than the impatience to shout for a bigger number. Labour came to office promising a government guided by evidence. The evidence, in this case, is sitting in its own Treasury’s files. The only question now is whether anyone in Downing Street is willing to read it.
