Labour’s jobs tax is proving the Laffer curve in real time
Widespread falls in hiring and increases in redundancies are a textbook demonstration of how tax can destroy economic activity. Labour’s National Insurance rise is proving economic theory before our eyes, says Matthew Kilcoyne
Sometimes the data tells a story so clear it hurts. The latest CIPD survey gives us exactly that – a textbook demonstration of how tax policy destroys the very economic activity it seeks to tax. It’s the Laffer curve stepping out of theory and into reality, and it’s happening right before our eyes.
Let’s be clear about . A third of British firms are planning to cut jobs or freeze hiring. Nearly half will raise prices. A quarter are scaling back investment plans. This isn’t just businesses complaining – it’s the market speaking, and we’d do well to listen.
The trigger? Labour’s planned National Insurance hike from 13.8 per cent to 15 per cent above £5,000. A simple tax increase that’s proving anything but simple in its effects. The government might call it “delivering stability,” but the market is delivering a rather different verdict.
What makes this particularly fascinating is where it’s hitting hardest. The CIPD’s Peter Cheese points to the “everyday economy sectors” – retail, hospitality, the engines of ordinary economic life. These aren’t the City firms that can absorb costs or shift operations. These are the businesses operating on tight margins, where every penny of additional tax translates directly into hard choices about employment, investment and survival.
The Federation of Small Business reports confidence at decade-lows, excluding the pandemic. The British Chambers of Commerce sees sentiment at two-year lows. When you’ve lost the small businesses and the chambers of commerce, you’ve lost the backbone of the British economy.
But here’s what makes this more than just another business story: we’re watching economic theory validate itself in real time. Arthur Laffer’s famous curve, sketched on a napkin in 1974, predicted exactly this. Push tax rates too high, and you don’t just slow economic activity – you destroy it. The very mechanism meant to fund public services ends up eroding the base it seeks to tax.
Compound effects
The Bank of England’s projections of 3.7 per cent inflation peaks suggest we’re heading for a compound effect. Tax-driven price increases feed into inflation expectations, potentially triggering wage-price spirals that amplify the original distortion. It shows how well-intentioned policy can cascade into unintended consequences.
The Treasury’s defence – that they’re “delivering stability businesses need to invest and grow” – reads like satire against this backdrop. There’s nothing stable about forcing a third of businesses to reconsider their employment levels. There’s nothing growth-promoting about driving a quarter of firms to cancel investment plans.
This raises fundamental questions about the limits of state capacity. If businesses are this responsive to tax changes, what’s the actual ceiling on sustainable revenue extraction? The answer appears to be lower than many in Westminster would like to admit.
The Laffer curve isn’t just theory. It’s not just an academic concept or a conservative talking point. It’s a binding constraint on state action
For policy makers, the lesson should be clear: the Laffer curve isn’t just theory. It’s not just an academic concept or a conservative talking point. It’s a binding constraint on state action, and right now, it’s binding tighter than is comfortable.
The question isn’t whether these effects exist – the data is unequivocal. The question is whether we’ll learn from this natural experiment or continue testing these limits until the damage becomes undeniable. Given the Treasury’s response so far, I’m not optimistic about the answer.
In the end, this isn’t just about tax policy. It’s about the fundamental limits of state intervention in market economies. We’re discovering those limits the hard way, one cancelled investment and lost job at a time. The theory was right all along. The only question is how much economic damage we’ll endure before we accept it.
Matthew Kilcoyne is a free market economist and commentator