The Laffer Curve in Action
rodgercuddington.substack.com
rodgercuddington.substack.com
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UK's situation is akin to someone who used to be rich and but that wealth has been steadily eroded. But that person still insists on having the same standard of living.
There is a generation of Brits who do not know what true sustained shortage is or what rationing is. They have never experienced blackouts or lawlessness. (What is being experienced right now is just a trailer)
So there are only two options really:
1. Insist on maintaining the standard of living
2. Willfully accept to lower the standard of living
Brits want (1) but the govt doesn't have the money and yet they don't want to pay for it.
This results into govt looking for every opportunity to tax. This results into passionate discussions on whether this is fair or not.
These debates even though understandable at times loses the sight of fact that this is a result of choice (1).
As for taxes, the govt will squeeze anything which resembles a pot of money which was untouched so far. Also the expenses (due to choosing (1)) are going to rise every year.
What will be left for the govt to tax next year or 5 years from now? The govt will run out of things to tax eventually. This is clearly not sustainable.
I think also the law of averages is catching up with Brits i.e. after so many generations (since the colonial era) there will be come a few generations which will be worse off.
__What is the way forward?__
This is not a solution to the problems but to accept the hard reality that there are going to be few generations of people who will have to make peace with a lower standard of living, work hard without getting much in return, so that their grand children will enjoy a much better life.
In other words, the current generation (and maybe next) has to swallow the hard pill.
These sacrifices on families come in multiple forms like:
1. Low wages, increased work hours
2. Prepare to go abroad for work to earn a little extra, just like skilled migrants from less developed countries do.
3. Make the best with what you have
4. Living within means.
5. Become less materialistic
6. Prepared to do work which Brits did not like and passed on to the immigrants
7. Pay for healthcare
8. Substantial reduction in benefit amounts.
9. Everyone in family has to work
(This does not talk about what govt should do, which should be a different post)
The problem is that that often isn't what happens. The one who works hard for little in return, rather than catching up, is behind forever. One works for compensation only.
Accepting low wages isn't a 'sacrifice' that is eventually repaid. A sacrifice rather takes the form of working for high wages while saving.
This completely depends on the policies of the future govt. There are many examples (like South Korea, China, India) where the current generation is much better off than previous.
Another example is cliched "American Dream". There is/was some element of truth that if you are sincere and ready to work hard you can still make it in the life. However, I will agree that this can become much harder now.
Instead, getting a high salary now is used as negotiation for getting a high salary tomorrow, so it is critical to ensure it. You do not gain by accepting a lower salary.
If consumption must be reduced, that may be so, but if it is done by reducing salaries, and your salary is part of it, then you will lose and you will never be repaid for it.
It is not a question of being eventually repaid. It is to survive to fight another day. There are countless examples of how first generation immigrants (across all ethnicities) have to struggle and sacrifice so that they can provide the foundation for the next generation to thrive.
This is the mode Brits will have to enter into unfortunately.
> It's not like the other European countries are any better off
Agree. As I said at the start this is applicable to other rich nations as well like the France.
In short, the UK will go down from 1st world to 2nd world (if one does not like the term: 3rd world).
My point was that some part of the issue is labor supply, so one country giving up, might actually fix it for the other countries in the short term. This is why no one wants to defect.
Also doing anything to improve things or move in your proposed direction means acknowledging that we did huge mistakes in the past 20-30 years, and accepting that we are actually globalization losers. However most politicians are still the same or in the same party, that still promotes more globalization will fix everything. Also in university the mere idea, that maybe sending all IP to and training China, is maybe not the best idea and that we are now not the more powerful side any more, gets immediately shouted down as "xenophobia".
I agree with what your implying, but my take is that Brits cannot (and should not) wait for Govt to come to its senses.
I am saying take inspiration from Brits of few generations back who ventured out, took calculated risks and endured sea travel for months to reach far out places to find opportunities. I mean do the modern equivalent of this. They did the grind so that the next few generation benefited.
Also, industrial revolution happened because of individual brilliance and not some govt policy. The only thing govt did was not get in the way.
Not everyone will be able to do this but sometimes it takes few people to inspire millions.
1. The non-dom tax was the stupidest tax I've ever heard of. Somehow the owner of the Daily Mail, Lord Rothermere, all sorts seemed to be able to claim non-dominant status, and they were going home shortly to whoever that was. Meanwhile, anyone who moved to the UK from abroad would no doubt have found out on arrival at a low rate that they didn't have to pay tax on their overseas money. They would have shrugged their shoulders, broken into a smile, and moved on.
However far and away the worst part of it was: that person was not subject to UK tax for all of their non-UK investments. Now, only a complete moron would make any UK investments. So their entire contribution was their Mayfair lunch bills and the maids they hired. That had to go, and they (nothing wrong with them individually of course) are no loss.
CGT - it was tomfoolery having it at 10%. Lowest by far amongst industrialised countries (well before the rich stopped having to pay tax at all in US). May as someone lucky enough to start a business and take it to sale, we spoke once about tax on day 1, and then again a year before the end. The idea of embarking on an incredibly ambitious idea, and then handicapping yourself to save 8% on CGT were the millions to come... is what no founders have ever done. Squealing from the hundred millionaires about being $10 million lighter in theory for capital gains. It's a narrow cane was embarrassing. I remember one point out they'd worked on weekends to make this money...
Finally, may I say your examples for international competition are not very fulsome and not very fair. Dubai is a complete red herring of course. Good luck getting that Portuguese visa now. Ireland, you've just picked the one element of their tax code that is lower.
Oh one more. CGT tax rises didn't come in until oct 24, after your 14% decline. Reason they went down is the same reason they always go down - asset prices were down.
*On non-dom status:* You’re absolutely right that the old non-dom regime was indefensible as policy. The idea that someone could live in Mayfair for decades, contribute significantly to the UK economy and society, yet structure their affairs to avoid UK tax on worldwide income was indeed absurd. Lord Rothermere is the perfect example of the inequity. My point wasn’t to defend non-doms, but to note that their departure represents a revenue loss - which it objectively does, regardless of whether the previous regime was justifiable.
However, I’d push back on your characterisation that their only contribution was “Mayfair lunch bills and maids.” Many non-doms were significant employers, investors in UK businesses, property owners paying substantial SDLT and council tax, and contributors to UK charities and institutions. The departure of 1,800 people (50% above OBR forecasts) does represent a genuine fiscal impact beyond lunch bills.
*On CGT rates:* Here you’re on shakier ground. You say “it was tomfoolery having it at 10%” and claim this was the “lowest by far amongst industrialised countries.” That’s simply not accurate. Looking at OECD data:
- Switzerland: 0% (cantonal taxes vary but often much lower than UK) - Belgium: 0% on shares - New Zealand: 0% in most cases - Luxembourg: 0% after 6 months - Netherlands: effective rate often under 10% - Germany: 26.4% but only on recent gains
The UK’s 10% rate for BADR was competitive but hardly an outlier. And your claim that “no founders have ever” made decisions based on tax planning simply doesn’t match reality. Talk to any M&A advisor or tax accountant - timing of exits around tax changes is absolutely a consideration for founders and investors. It may not be the primary driver, but it’s certainly a factor in a multi-million pound decision.
*On asset prices explaining the CGT decline:* This is a fair point worth examining. You’re correct that CGT receipts are volatile and correlate with asset prices. However, the OBR itself attributed the shortfall to factors beyond just asset price movements - they specifically noted behavioural responses and structural changes. The 19% decline from £16.9bn to £13.7bn over two years occurred during a period when equity markets were actually relatively stable or rising (FTSE 100 up, property prices mixed but not collapsing). If it were purely asset prices, we’d expect to see similar patterns in other countries with buoyant markets - but we don’t.
*On international competition examples:* You dismiss Dubai as a “complete red herring” but that’s where the wealthy are actually going - 9,800 millionaire inflows projected. Whether you or I like it is irrelevant; it’s happening. On Portugal, yes, they’ve tightened some golden visa rules, but they remain significantly more attractive than the UK for many tax purposes. And on Ireland, I deliberately picked corporation tax because that’s the rate that matters most for business location decisions - which is precisely what we’re discussing.
*The fundamental point:* You can argue about whether individual tax changes were justified on equity grounds (and I’d agree with you on non-doms), but that’s separate from whether they’re producing the revenue forecasted. The OBR’s £7.5bn shortfall is a fact, not opinion. The 50% higher-than-forecast non-dom departures are measurable. The CGT revenue decline is in the data.
Whether these policies are morally right is one question. Whether they’re achieving their fiscal objectives is another. The evidence suggests they’re not - and that’s the Laffer curve dynamic in action, regardless of how we feel about the underlying fairness of previous regimes.
What’s your view on the broader revenue shortfall and the OBR’s structural deficit assessment?
On CGT comps - all those are not straight forward. You can have Switz, NZ, and Bel. You can't have Lux (22% if hold >10%) or Netherlands (the system is mental... - they get their 30% though)
I think the bulging argument against the 19% two year decline is the first of those years you cite was before the labour govt, and before any changes?
But on the timing point - that’s actually my exact argument. The 19% CGT decline from £16.9bn (2022-23) to £13.7bn (2024-25) happened BEFORE Labour’s October 2024 rate increases. The decline occurred under the Conservative government while rates were still at the “low” levels you criticised.
That’s precisely the problem: revenues were already falling when rates were at 10%/20%. Then Labour increased them to 18%/24% in October 2024, likely accelerating the decline further (we’ll see in the next fiscal year’s data).
So the revenue decline can’t be blamed on Labour’s rate increases - it happened before them. Which suggests either:
1. Even the “low” rates were still high enough to trigger behavioural responses, or 1. Other factors (non-dom changes announced, anticipated tax increases, international competition) were already driving capital flight
Either way, it supports the Laffer curve thesis: the tax base was shrinking before the rate increases, and those increases are unlikely to reverse the trend.
The OBR’s £7.5bn shortfall report (March 2025) specifically attributes this to behavioural factors beyond just asset prices, which is why they classified £4.5bn as structural rather than temporary.
What’s your read on why CGT revenues fell 14% in 2023-24 if rates hadn’t changed yet?
However, I am sure you will rejoice with me in the November update forecasting a 50% rise next year in CGT receipts to $20 billion for 25-26. England is not quite finished!
https://obr.uk/efo/economic-and-fiscal-outlook-november-2025....
Yes, the OBR forecasts £19.7bn for 2025-26, up from £13.7bn in 2024-25. But here’s why this supports rather than contradicts the thesis:
*That’s a one-time spike from forestalling, not sustainable revenue*
The £19.7bn is driven by people rushing to sell before the rate increases - bringing forward disposals they would have made over several years. The OBR explicitly models this as forestalling that then reverses:
- 15% lower disposals in 2025-26 (after the spike year) - 30% lower in 2026-27 - Then gradual recovery
So you get one bumper year, then years of depressed activity. The total revenue over 5 years is lower than if rates had stayed stable - classic Laffer dynamics.
*The £20bn downgrade you might have missed*
More tellingly, the OBR’s Spring Statement 2025 (March) found that CGT receipts over 2025/26-2029/30 would come in £20.6bn under the Autumn Budget forecasts made just months earlier. That’s a massive downgrade driven by “updated data on the composition of liabilities” - i.e., the behavioural responses were larger than modeled.
*Stable rates were already causing problems*
Your original point was “you can’t have a downward trend with rates stable and claim Laffer!” But that’s precisely the point - the decline from £16.9bn to £13.7bn happened before Labour’s rate increases, when rates were at 10%/20%.
What was driving it? Expectations. People knew changes were coming. Non-dom abolition was announced. Labour’s tax intentions were clear. International competition was intensifying. The behavioural response began before the policy was implemented.
*The real test*
The real question is what happens after the forestalling spike unwinds. OBR projects £25.5bn by 2029/30, but that’s based on equity prices rising with GDP and no further behavioural response. Given:
- 1,800 non-doms already left (50% above forecast) - Carried interest moving to income tax framework at 34% in April 2026 - £20bn revenue downgrade between Autumn and Spring forecasts - Continued international tax competition
…I’d wager the 2029/30 number ends up significantly below £25.5bn. We’ll know in 4-5 years, but the early indicators aren’t encouraging for the Treasury.
So yes - you’re right that forestalling creates a temporary spike. But temporary spikes that reverse aren’t evidence against the Laffer curve - they’re textbook examples of how tax policy distorts behavior and timing without increasing long-run sustainable revenue.
Oh yes - well it is ofc too early to draw any conclusions yet, but my original point was... no point having a rate vastly lower than other industrialised nations - just leaves money on the table. Can never compete with zero in Dubai with low rates. Governments will have to address that in another way.
However I would say as someone who paid a chunk of tax upon selling a business, and I am way outside any actual knowledge here, CGT must be a real laggard. You generally can't just switch the domicile and the local tax man just shrugs their shoulders.