|
 |
The Laffer Curve in Action
Read the new discussion paper by Dr Christopher Snowdon, Head of Lifestyle Economics at the IEA
|
| |||||||||||||||
Britain’s tax burden is heading for its highest level since the early 1950s, yet a growing number of taxes are now raising less money, not more. The Laffer curve shows that beyond a certain point, raising a tax rate reduces revenue, as people cut back, buy from illicit sources or evade the tax altogether. Alcohol duty, tobacco duty and landfill tax all appear to have passed that point.
In each case, the Office for Budget Responsibility (OBR) expected higher rates to bring in more revenue. Instead, receipts from the three taxes fell by £3.2 billion between 2021/22 and 2024/25, leaving the public finances £5.2 billion worse off than forecast, while fuelling a booming black market in cigarettes and record levels of fly-tipping.
This new discussion paper, by Dr Christopher Snowdon, Head of Lifestyle Economics at the IEA, argues that several UK taxes have been pushed into the ‘prohibitive range’ of the Laffer curve, where further rises cost the Exchequer money, create huge opportunities for criminals and leave the public to pick up the bill.
 |
Snowdon argues:
Following reforms in August 2023 that raised duty on spirits and many still wines, alcohol duty receipts fell from £13.2 billion in 2021/22 to £12.4 billion in 2025/26 despite high inflation, when the OBR had expected them to reach £14.2 billion by 2024/25.
Real-terms tobacco duty revenue fell by 40% between 2021 and 2025. A 20% fall in the number of adult smokers explains only part of this: the number of smokers buying on the black market doubled between 2023 and 2025, and almost a third of cigarettes consumed in Britain are now illicit.
Landfill tax has risen from £7 per tonne in 1996 to £126.15 in 2025, yet it now raises half as much in real terms as it did at its 2013 peak, while recorded fly-tipping incidents in England rose by 31% to an all-time high of 1.26 million in 2024/25.
The OBR’s repeated overestimates point to an over-reliance on static models and a failure to anticipate predictable behavioural responses to excessive taxation, such as smokers switching to illicit tobacco and firms turning to fly-tipping.
You’re currently a free subscriber to Economic Affairs. For the full experience, upgrade your subscription.
Paid subscribers support the work of Economic Affairs and the IEA's charitable mission and receive special invites to exclusive events.
| ||||||||||
