We need a crack down on tax avoidance

After the Budget there was a lot of anger over the pasty tax and the granny tax. Another big rise — in tobacco taxes — didn't make as many headlines, because it wasn't much of a surprise. But for someone smoking a pack a day it almost wiped out the entire value of the rise in the Personal Allowance. Given that most smokers earn relatively low incomes, it was probably the most regressive measure in the Budget.

The idea is that smokers are supposed to be grateful for this impetus to give up. Many will keep smoking though, and this will just be yet another strain on their household budgets. Some will respond by buying more from the illicit market.

Many people who don't want to move abroad are pushed towards doing so when Income Tax rates rise, driving a greater and greater divide between their post-tax incomes here or in Switzerland. Most smokers don't want to buy dodgy cigarettes. But if we make it more and more expensive not to then they'll respond to that incentive. One report found that the tax avoidance response to changes in these taxes was twice the consumption response - it's equivalent to two people switching to the illicit market for every one who gives up.

The same goes for alcohol and diesel. The amount of money at stake is significant. A new TaxPayers' Alliance report out today looks at how it is enough to take a penny off the basic rate of Income Tax. More than that, HMRC are serially too optimistic about how good a handle they have on the situation. They consistently have to revise their estimates of that tax gap up by hundreds of millions of pounds each year.

  Behavioural responses are critical to the overall effects of all kinds of taxes and regulations. If the Government introduce plain packs that is likely to make things easier for the criminals running the black market too. As politicians take more and more in tax, in a vain attempt to control the deficit while leaving most of the planned spending cuts to another year, it won't just be bashing the rich that produces underwhelming returns. As the political backlash grows and the returns to taxes diminish, how long before we realise that we are straining the taxable capacity of the British economy?

Matthew Sinclair is director of the Taxpayers' Alliance