Summary

The Laffer curve illustrates a principle understood since Adam Smith: beyond a certain point, raising a tax rate reduces the revenue it brings in. Overall tax revenue in the UK has risen as the tax burden has grown, but several individual taxes now appear to have been pushed into this ‘prohibitive range’.

Alcohol duty, tobacco duty and landfill tax were all expected to raise more money after rate rises. Instead, alcohol duty receipts fell despite significant inflation, real-terms tobacco duty revenue fell by 40% between 2021 and 2025 as smokers turned to the black market, and landfill tax now raises half as much in real terms as it did at its 2013 peak, while fly-tipping has reached record levels.

Together, these three taxes yielded £5.2 billion less than the OBR projected. This points to an over-reliance on static models that fail to anticipate how people respond to excessive taxation. Pushing taxes too far not only loses revenue but creates huge opportunities for criminals, and the cost of dealing with them falls on the public.