The arguments about what's sometimes called "supply-side" economics shaped much of the politics of the Reagan/Thatcher years, and recent failed attempts to reverse tax hikes shone a light on tax rates' incentives. With the UK government expected to tighten the screws further this week, we ask how this will affect the debate on tax policy.

The term "supply-side" economics is thrown around a lot (often by those who attack it) and, of course, the term was in evidence when former UK Chancellor of the Exchequer Kwasi Kwarteng tried – and failed – to reverse a number of the Rishi Sunak tax hikes earlier in the year, as well as reversing the 45 per cent rate of income tax. Kwarteng is now on the back benches in the House of Commons, and the new Chancellor Jeremy Hunt is due to deliver his budget statement today; it is expected that taxes will rise.

In particular, thresholds for income tax and inheritance tax, for example, will not be increased for several years, which means that taxpayers will pay more due to the "fiscal drag" effect of inflation. As for reversing things such as the top rate of income tax, that's strictly for the birds in the UK. (It is hard to credit that, by contrast, the top rate of income tax in Singapore is 22 per cent, and due to rise to a positively vertiginous 24 per cent in a year's time.)

It has also been suggested that the capital gains tax could rise, that lifetime pension savings allowances will be frozen further or cut, and that even the non-domiciled residency regime that has operated in the UK for more than 200 years might be in trouble (it has already been squeezed in recent years). Whatever Hunt announces, the tax take of the State is going to rise for some time, and there is little sign that the opposition Labour Party is going to reverse that. (To the extent that it gives detail, the Labour Party has called for moves such as abolishing the non-dom system. See a Wealth Talk video on that topic.)

One of the claims made about cuts to marginal rates of tax (income, capital gains, corporate taxes, stamp duty, etc) is that they stimulate growth and increase revenues, rather than reduce them. This draws on the idea that the economy is not an inert pie that somehow just came out of nowhere and can be divided into "fair" shares. Wealth is created by people exchanging their knowledge, time and resources for things which they value more highly, producing a bigger pie.

The higher marginal rates are, the more that the risk-taking entrepreneurship and work ethic that drives all this is attenuated. Cutting marginal rates – the rate at which a tax rate kicks in – can reverse this disincentive, so the argument goes. Tax cuts may not "pay for themselves," and there is not a simple, linear effect, but there is an effect nonetheless. People have heard of the "Laffer Curve" (a tax rate of 100 per cent and zero which both create no revenue, with some "optimal" share in between these points). In the US, for example, tens of thousands and more people have left high-tax states such as California, New York and Illinois and moved to Florida, Tennessee and Texas. (This arguably is even changing the political complexion of these states, as seen by the thumping governorship victory of Ron DeSantis in Florida last week.)

The US-based Tax Foundation think tank recently issued its annual International Tax Competitiveness Index, which showed the UK coming in a measly 26th out of 38 OECD countries. UK corporation tax is due to rise to 25 per cent next April and the "super-deduction" is going to expire. Data shows that the UK will be 33rd of 38 overall and ranking very low on business taxes (33rd), consumption taxes (34th) and personal taxes (34th) (source: Centre for Policy Studies, Tax Foundation). These figures make for ugly reading, whichever side of the political fence you are on.

In the UK, as readers know that there has been a trend of middle-aged professionals, such as medical GPs, taking early retirement. There are reports that taxes on pensions and so forth may be encouraging this workforce exodus. The future productivity of the UK depends in part on building up real savings to fuel investment – if pension savings are squeezed in the long term, that's going to crimp growth. When people retire early and tax plays a role, that's arguably a loss to the wider economy of human capital built over a lifetime.

The argument about the disincentive impact of taxes remains fierce, and a problem is that political opinions play a role and cannot just be judged on the raw data. Arguing for tax cuts is often painted as "right wing" or even "reactionary." This was different in the UK in the 19th century when the abolition of agricultural tariffs and cuts to other taxes was a progressive cause. Part of the issue is that a lot of commentary assumes that economics is a "zero-sum" – if A has a lot of money, he/she must have taken it from B. It's wrong but a deeply ingrained view.

Related to this are ideas of fairness. At a gut level, it appears correct that the wealthiest should pay more tax, but then the question is "what should the proportion of income be?" There comes a point where rates look more like outright confiscation. 

A few years ago, a former colleague of mine Tom Bergin wrote a book in which he attacked a number of these supply-side, pro-incentive, ideas. He stated that there is not much evidence, for example, that entrepreneurs work less hard and take fewer risks if their profits are heavily taxed. Or at the very least, there is not, in his view, a linear relationship. I think he is wrong on some of the specifics (although he is formidable in his use of data). Well, now's a good time to see how well they stand up to the economic evidence.

The next few weeks and months will test how weak or strong supply-side economic ideas are, and whether we are on the wrong side of the Laffer Curve or not.