When Laffer says the UK is taxing itself to death we should pay attention, says Hamish McRae

We’re a month away from the Budget, and the Treasury is, by all accounts, desperate.

The new Chancellor doesn’t understand what is happening and the PM isn’t interested.

The Government’s finances look increasingly worrying. Borrowing is running above target and the mix of higher gilt yields and higher inflation mean borrowing yet more is not a realistic option.

Maybe John Healey and Andy Burnham can trim spending, as they jolly well ought to, but even so, there will have to be tax rises.

How? We’ve heard the stuff about getting more from the relatively wealthy. It’s wrapped up in slimy language – ‘asking’ those with the ‘broadest backs’ to ‘contribute a bit more’. 

But there is a big problem. We may be at or beyond the point on the Laffer Curve where increasing tax rates brings in less revenue, not more.

The new Chancellor, pictured, doesn’t understand what is happening and the PM isn’t interested

The story goes back to a graph drawn by economist Art Laffer on a napkin at a dinner in 1974. It showed that sometimes by cutting tax rates you raise revenue.

On one side of the graph the tax rate is zero. That brings in no money. On the other side it’s 100 per cent. That also brings in no money, because people or businesses won’t do the activity that’s being taxed so highly.

Somewhere in between there’s a peak and if you want to maximise revenue and activity you have to be on the right side of it.

Laffer has recently been causing a stir by criticising this government, saying it was taxing itself to death and he couldn’t believe it was considering a wealth tax. 

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This did not go down well with our current political masters, but in person he is persuasive and charming. 

I had lunch with him some years ago and he made his point by telling a story about Robin Hood.

In the fable Robin Hood robbed the rich to help the poor and became a folk hero. But what, asked Laffer, did the rich do to avoid being robbed? They didn’t travel through Sherwood Forest at all, or they hired a troop of bodyguards to defend them. That, he said, is what they do now.

We see this all the time. Companies set up in ‘X’, which has much lower corporation tax than in ‘Y’. People move offshore.

Sir Jim Ratcliffe, the founder of the chemical giant Ineos, went to Monaco in 2020. Chris Rokos, the hedge-fund billionaire and our third-largest payer of income tax, has just gone to Greece.

As for the bodyguards, Laffer explained they are the expensive lawyers and accountants that defend wealthy people against Revenue & Customs.

So where are we on the Laffer Curve? Claritas Tax, an advisory firm, put out a note on Friday arguing that we’re at the top of the Laffer Curve and that tax receipts will start to slide.

Start with the top rate of income tax, 45 per cent. We are clearly over the top. Back in the 2020-21 tax year our top 1 per cent of earners accounted for 30.7 per cent of all income tax revenue. 

Since then that proportion has started to decline and fell to 26.6 per cent in 2025-26.

Corporation tax? Not clear, but revenue growth is slowing after the sharp rise in the main rate from 19 to 25 per cent in 2023.

Stamp duty on shares? The rates haven’t changed but our habits have. Revenue peaked at £4.8billion in 2000 and is now £4.32 billion, which is a huge drop in real terms.

Revenue on stamp duty on property moves has gone on climbing, but at a cost in cutting the number of transactions.

In 2006 annual home sales reached 1.67million. Last year, despite the increase in population, it was 1.2million and this year is running lower still.

Since we spend money on kitting out new homes when we move, lower transactions cut tax revenue in other ways, too.

Finally, what of national insurance? That last increase, by Rachel Reeves, did bring in an extra £25billion a year.

But it has already pushed up prices and cost upwards of 100,000 jobs – and I fear more job losses are on the way.

So what will Healey and Burnham do come October 28? I don’t know. But I suggest Healey invites Laffer in for lunch.

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