The Laffer Curve, conceived by economist Dr. Arthur Laffer, illustrates the relationship between tax rates and government revenue. While Laffer popularized the term, the idea has been around since the 14th century, with roots in the writings of Muslim philosopher Ibn Khaldun and references in John Maynard Keynes' work. 

In essence, Laffer's theory posits that excessively low tax rates yield insufficient revenue, while overly high rates can deter productive behavior, ultimately decreasing tax income. Activities subject to tax, such as consumption, share sales, and investments, may decline if taxed too heavily, negatively impacting government revenue.

The Laffer Curve suggests an optimal tax rate—neither too high nor too low—that maximizes tax revenue without altering taxpayer behavior. This principle is particularly relevant in the context of Capital Gains Tax (CGT) and the Chancellor's recent decision to raise this tax to 24%. While this increase fell short of the anticipated hikes, which some speculated could reach 39%, it is expected to generate some additional revenue without a substantial impact. 

Why 24%?  

A recent precedent exists: Jeremy Hunt reduced the CGT rate for selling second homes from 28% to 24%, effective April 2024. This adjustment was partly intended to alleviate the financial burden on second homeowners facing additional taxes elsewhere. The rationale behind this lower rate was to incentivize property sales, subsequently boosting tax revenues and freeing up housing for first-time buyers in a market desperately in need of inventory. 

Advised by Treasury officials, Hunt believed 24% hit the sweet spot on the Laffer Curve.  

Robert Peston remarked on X that the shift to 24% was less radical than anticipated, attributing it to HMRC's lack of resources to fully analyze the implications of a more comprehensive overhaul, leading Reeves to choose a less controversial path. However, it seems unlikely she overlooked Whitehall reports indicating that a more significant increase in CGT would likely result in reduced overall tax revenue due to behavioral shifts in investment.  

Ultimately, 24% appears to be the ideal rate on the Laffer Curve, as she was likely advised. While the true rationale behind the decision may remain elusive, it underscores a shared recognition among politicians and economists of the limits to which tax rates can be raised before they lose effectiveness. 

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