Most taxes end up a shade over the peak of the Laffer Curve
We’d not want to claim this is a proof, rather a tendency. We all know that there is indeed that Laffer Curve, a rate at which tax collection peaks - either higher or lower rates reduce revenues. We, ourselves, think that we should in fact be aiming at the growth maximising rate, something much lower. We’d also insist that, over time, the growth maximising rate is the revenue maximising one. For economic growth works like that. But that does also require a time horizon well past the next election and so is not something that politics is ever going to consider.
But, back to Laffer. We suggest that tax rates will rise, given the joy politicians take in spending ever more of our cash, until raising them further will collect no more money to be spent as the politicians desire. In fact, a little above that revenue maximising rate as politics is a little slow in recognising such things and none too good at detail to boot. That’s just where tax rates do end up, a little over where the revenue maximisation occurs.
A fresh tax raid on the wealthy risks backfiring and losing the Government money, Tory analysis of Treasury data suggests.
Internal government modelling indicates that the top rate of Capital Gains Tax (CGT) is already so high that further increases will lead to lower tax receipts.
Figures presented to the Government before Labour’s first Budget in 2024 show that the Treasury assumed it would raise less and less money from investors, business owners and landlords through CGT as it rose.
After a certain point, increases would lose the Exchequer money as the high rate puts people off selling assets such as shares, businesses and second homes.
Tory analysis of the Treasury’s assumptions suggests this tipping point is when CGT is levied at 22pc.
Rachel Reeves, the former chancellor, has already raised the top rate of the wealth tax from 20pc to 24pc. However, John Healey, her successor, is now facing pressure to increase it further.
Back when the indexation allowance was removed and the rate lowered to compensate the calculation was that 18% was the revenue maximising rate. It has already crept up from that - tax rates always do end up just a bit above the revenue maximising rate. QED.
Tim Worstall