Sin taxes and the Laffer Curve

It's the Budget tomorrow. Either Rachel Reeves has being engaging in some epic expectation management or if it is going to be the mother of all tax grabs. In expectation of the latter, every killjoy pressure group in the land has been lobbying for taxes on activities of which they disapprove. 

I wrote about this for The Spectator last week, but it is worth underlining how unwilling smokers and drinkers are to be squeezed any further. Between 2021/22 and 2023/24, the smoking rate fell by 10% but the number of legal cigarettes sold fell by 31%. The shortfall has obviously been taken up by the black market and the government is receiving much less tobacco duty revenue as a result.

UK tobacco duty revenue (HMRC)

2020/21: £9,964 million

2021/22: £10,278 million

2022/23: £10,004 million

2023/24: £8,804 million

 

From an all-time high of £10.3 billion two years ago, revenues have fallen by £1.5 billion in just two years. Dig deep, nonsmokers!

Alcohol duty revenues tell a similar story. They had already begun to decline by August 2023 when the government introduced a 'simplified' new alcohol duty system which led to some serious price hikes for some drinks. This came alongside a large rise in alcohol duty overall, which rose in line with the Retail Price Index. As with tobacco duty, alcohol duty was bringing in record amounts in 2021/22, but despite significantly higher taxes, revenues are now lower.

Wine duty revenue (HMRC)

2020/21: £4,659 million

2021/22: £4,734 million

2022/23: £4,391 million

2023/24: £4,611 million

Spirits duty duty revenue (HMRC)

2020/21: £4,115 million

2021/22: £4,401 million

2022/23: £4,136 million

2023/24: £4,137 million

 

Revenues from beer and cider duties have fallen too.

 

All these figures are in nominal terms. Adjusted for inflation, tobacco duty revenue has fallen by £3.6 billion (-29%) since 2021/22 and alcohol duty revenue has fallen by £1.9 billion (-13%). By raising taxes, the government has created a blackhole of £5.5 billion, helped close more pubs and pushed even more smokers to the illicit market. Way to go!

As for the idea of doubling gaming duty to 41%, as being pushed by the Social Market Foundation, it would wipe out much of the legal market by demanding companies hand over much more than they make in profit. That might be a feature rather than a bug as far as anti-gambling groups are concerned, but it is not what Rachel Reeves wants.

 

As I said to the Telegraph recently....

 

“If Rachel Reeves thinks there is easy money to be had by squeezing drinkers and smokers, she will learn the hard way that higher taxes do not always produce more revenue. 

“Tobacco duty revenue has fallen by £1.5bn in the last two years as smokers turn to the black market. Tax revenue from wine and spirits has fallen by hundreds of millions.

“Britain is not a low tax country with plenty of money to spare. We have some of the highest taxes on alcohol and tobacco in Europe and people have had enough.”