The tax gap and the Laffer Curve

HMRC has released their estimates of the tax gap:

Key findings for hand rolling
tobacco (HRT)
• The illicit market share for HRT was estimated to be
38 per cent in 2010-11, with associated revenue losses
of £660 million.

My word, that is a surprise, isn\’t it? Tax the crap out of something easily smuggled and which is hugely cheaper in nearby places…..and you end up with everyone smoking the smuggled stuff. Just such a surprise, eh?

Table 1.1 shows estimates for the
tax gap for 2009-10 (revised) and 2010-11 across
HMRC administered taxes. The estimates show
an increase in the tax gap of around £1 billion
from 2009-10 to 2010-11. This increase is mainly
due to increases in the VAT rate from 15 per cent
to 17.5 per cent in January 2010 and to 20 per
cent in January 2011.

Raise taxes more and people avoid/evade them more.

All just such a counter-intuitive response isn\’t it?

If you would, therefore, desire to reduce the tax gap the most obvious method is to reduce tax rates. Which is what a Courageous State would indeed do.

3 thoughts on “The tax gap and the Laffer Curve”

  1. “The illicit market share for HRT was estimated to be
    38 per cent in 2010-11, with associated revenue losses
    of £660 million.” …. probably mostly poor people, including some very poor people who would otherwise be heavily taxed on tobacco.

    One of the most forgivable of tax dodges.

    Interestingly, the spell checker in this text box did not want forgivable but wanted forgiveable – wiki give “forgiveable
    Common misspelling of forgivable.”

  2. Some years ago I read that the total taxes on cigarets for NYC residents had reached such a height and smuggling reached such heights that many small sops (specializing in newspapers, magazines, cigarets, candy, etc)–were forced out of business and now, virtually all smokers are smoking smuggled product.

    Don’t know whether true or not–just something I’d read.

  3. @Gene Berman:

    Yes, really strange, especially given the level of organized crime in New York and the fact that one of the classic papers on the “Laffer effect” although predating the usage was a study on the effect of varying cigarette tax rates versus revenues for New York from 1932 (I think).

    The higher the tax, the more people buy smuggled cigarettes purchased in a lower tax / zero tax state.

    The only winners end up being the smugglers, primarily the mafia in New York’s case.

    Can’t think of anything dumber.

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