Britain’s Laffer Curve for Capital Gains Tax On Top Earners

Answer the following questions to check your understanding of the story.

What are capital gains?

Capital gains are the profits earned from selling an asset for _________ its purchase price.

a) more than its

b) less than its

c) twice

d) the same price as its

Wrong! - Selling for less than the purchase price creates a capital loss. Selling for the purchase price creates no capital gain, and capital gains do not require the asset to double in price.

Perfect! - Capital gains are the profit from selling an asset for more than its purchase price.

How did the October 2024 tax increase affect capital gains tax revenue by fiscal year 2025?

It _________ the capital gains tax revenue.

a) decreased

b) increased

c) had an uncertain effect on

d) did not affect

Wrong! - The news clip reports that revenue fell. The tax increase was followed by lower revenue.

Good Job! - Revenue fell from £14.5 billion to £13.6 billion.

What is the reason for the change in capital gains tax revenue described in Question 2?

Many wealthy Britons ___________.

a) sold more assets in Britain

b) were no longer subject to the U.K. capital gains tax system

c) did not sell their assets

d) sold their assets at capital losses

Wrong! - The news clip says they moved abroad, not that they did not sell their assets, or incurred capital losses, and selling more assets in Britain would tend to increase capital gains tax revenue.

Well Done! - Wealthy Britons who moved abroad were no longer subject to the U.K. capital gains tax system.

Where is Britain likely to be on the Laffer Curve for capital gains tax on top earners after the capital gains tax rate increased to 24%?

Britain is likely to be ___________ the Laffer curve.

a) nowhere on

b) on the upward-sloping side of

c) were no longer subject to the U.K. capital gains tax system

d) at the peak of

Wrong! - On the upward-sloping side, a higher tax rate increases revenue. At a 24% tax rate, revenue is lower than it was at 20%, so 24% cannot be the peak of the Laffer curve. Every tax rate lies somewhere on the Laffer curve.

That's Right! - Raising the tax rate reduced revenue, indicating that Britain is on the downward-sloping side of the Laffer curve for capital gains tax.

If the highest capital gains tax rate were increased to 45% and wealthy Britons continued to leave the country, how might this affect Britain?

Britain would move ___________ of its Laffer curve for capital gains tax.

a) further down the downward-sloping side of

b) up the downward-sloping side

c) down the upward-sloping side

d) further up the upward-sloping side of

Wrong! - Lower, not higher tax rates, move a country down the upward-sloping side. Britain is not likely to be on the upward-sloping side of its Laffer Curve.

Well Done! - If, at a 45% capital gains tax rate, more wealthy Britons emigrated, Britain would move further down the downward-sloping side of the Laffer curve.

Based on the evidence, what is the likely revenue-maximizing capital gains tax rate for the top earners in Britain?

It is ___________, but the exact rate cannot be determined from the evidence.

a) likely above 24%

b) 0%

c) likely below 24%

d) likely above 40%

Wrong! - Since a 24% tax rate is already on the downward-sloping side of the Laffer curve, any tax rate above 24% lies even further to the right and therefore cannot be the revenue-maximizing tax rate. A zero capital gains tax rate would raise no capital gains tax revenue.

You Got It! - Since revenue fell when the rate increased to 24%, the revenue-maximizing rate is likely below 24%.

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