Compared to France, the United Kingdom could almost be seen as a model of fiscal discipline: its public debt hovers around 100% of GDP, while ours is already at 113% and well on track to exceed 115% by the end of the year. Nevertheless, for the British Office for Budget Responsibility (OBR), such a level will not be sustainable forever.

Thus, in the autumn of 2024, the new Labour Prime Minister Keir Starmer and his Finance Minister Rachel Reeves presented a “painful” budget that included both tax increases, investments in public services, and spending cuts.

A few explanations are in order.

In the mindset of the left, to which the current British government belongs, public debt is not really a problem. Either, as Jean-Luc Mélenchon strongly suggests, you “free yourself from the burden of debt” by canceling the share held by the central bank, thereby regaining borrowing capacity to launch investments in favor of “social and climate justice.” Or, as Thomas Piketty advocates, you raise new taxes by taxing, re-taxing, and overtaxing multinationals and the wealthiest taxpayers.

Well, let’s say that Mr. Starmer and Ms. Reeves built their budget by combining features borrowed from these two socialist schools of debt management! In line with the Piketty approach, the planned tax increases amounting to £40 billion are focused mainly on businesses and on the capital income of the wealthiest taxpayers, while, in a form of softened Mélenchonism, the public debt-to-GDP ratio will now be calculated excluding the loans taken out to finance investments of £20 billion per year (£100 billion over five years) in infrastructure and public services such as health (the National Health Service, or NHS) and schools.

However, knowing that the NHS, just like our French health system, has a knack for swallowing up billions of pounds year after year without in any way improving its essentially bureaucratic and disorganized operation, it is highly likely that the “investments” in question will in fact be simple sunk costs unlikely to fundamentally change the radically decrepit state of British healthcare, but conveniently excluded from the reported debt. And to think that there are people-sometimes even economists-who marvel at this crude sleight of hand…

That was an aside, because the point I want to highlight here concerns the handling of debt through targeted tax hikes on businesses and capital income. Since last autumn, the main capital gains tax rates have risen from 10% to 18% for basic-rate taxpayers and from 20% to 24% for higher-rate taxpayers. In addition, various previously granted allowances have been significantly reduced.

Are these draconian measures likely to reduce the UK’s public debt, even slightly, by bringing more tax revenue into His Majesty’s coffers? That is far from certain.

Indeed, last week, HM Revenue & Customs-the UK equivalent of our Treasury-reported that over the past twelve consecutive months (April 2024–March 2025), capital income tax receipts had fallen by 10% compared to the same period the previous year, representing £1.5 billion less in revenue despite the push on rates.

Already last month, during the spring budget update, the OBR announced that it was lowering its forecasts for this particular tax revenue. While it had expected in the autumn to collect £159 billion by March 2030, it now expects only £136 billion-a shortfall of £23 billion compared to Rachel Reeves’ hopes. The reason: the tax raid on capital gains.

In other words, once again, and in real time, we see-without any real surprise-that “too much tax kills the tax.” And, one could add, kills wealth creation. This phenomenon has been known for a very long time. In his Treatise on Political Economy (Book III, Chapter IX – On Taxation and Its Effects in General), the economist Jean-Baptiste Say already remarked in 1803 that:

“When it is pushed too far, (taxation) produces the deplorable effect of depriving the taxpayer of his wealth without enriching the government.” (Treatise, p. 320)

It does not enrich the government, because the more the state takes a large portion of taxpayers’ income (or wealth), the less capital they have to invest or consume. This leads to a weakening of the economy and thus a decrease in taxable income:

“There is therefore a loss for the taxpayer of part of his enjoyment, a loss for the producer of part of his profits, and a loss for the treasury of part of its receipts.” (Ibid.)

Conversely, a reduction in taxes, by leaving taxpayers a larger share of their income to devote to their personal activities, will increase tax revenues.

Say gives the example of Turgot, adding further empirical support for the Laffer curve, which posits that beyond a certain level, the higher the tax burden, the lower the tax revenue, due to the demotivating effect on labor supply:

“When Turgot, in 1775, halved the entry and market taxes on fish sold in Paris, the total amount of these taxes remained the same.” (Ibid.)

Closer to our time, we can cite the increase in tax revenues that resulted from the reduction in tax rates implemented by Margaret Thatcher in the UK, or the liberal reforms undertaken in New Zealand in the 1980s:

“We halved the income tax rate and abolished a number of ancillary taxes. Paradoxically, state revenues increased by 20%.” (Maurice McTigue, former New Zealand minister)

When taxation is particularly confiscatory, lowering tax rates and abolishing certain taxes will encourage expatriate taxpayers to return to their country and prompt others to increase their labor supply or investment activity, which will increase tax receipts. This will also revitalize economic activity due to the increase in available capital, with all the subsequent benefits for employment and purchasing power.

In the British case at hand, it seems that in response to the new capital tax, some wealthy taxpayers have postponed their plans to sell their assets in the hope that rates will fall in the future, while many others have simply decided to leave the UK. In all cases, this results in both a drop in tax revenues and a decline in activity in this specific area.

It may be that, in media and ideological terms, this movement delights the most convinced Labour activists, who believe in the harmfulness of the rich and capital for “social and fiscal justice.” But from a budgetary perspective, it is not very wise to drive away those most likely to contribute significantly to tax revenues. And in any case, it is naive to think that taxpayers will not react to massive tax hikes by adapting their economic behavior.

Meanwhile, faced with lower-than-expected tax revenues and in a context of a marked global economic slowdown-which has led to the UK’s projected growth being revised from 2% to 1% in 2025-the government had no choice, during its recent spring budget update, but to cut spending. Thus, £14 billion is set to be trimmed from ministerial operating costs and a number of social expenditures by March 2030.

A sort of last-minute Labour “DOGE” plan, which, unlike the tax hikes for the wealthiest, was not in the electoral program that brought Keir Starmer to power last July. But which now seems necessary, for the sake of debt sustainability…

Laffer Curve: https://en.wikipedia.org/wiki/Laffer_curve