High prices and smuggling: nothing to see here, says BHF

Last week, the Economist produced an article about sin taxes which made the fairly obvious statement that...

...when duties rise so do the incentives to get around them, by buying abroad or on the black market. This is particularly common with cigarettes, which are easy for individual smokers to import. In 2000 non-duty consumption reached a peak of 78%, according to the Tobacco Manufacturers’ Association—a consequence of the weak euro as well as a sudden increase in taxes of inflation plus 5%.

Pretty uncontroversial, but not to the British Heart Foundation, who have a letter published today:

SIR – Your article on sin taxes in Britain (“The high cost of virtue”, December 31st) took at face value claims by the Tobacco Manufacturers’ Association that cigarette smuggling in Britain peaked in 2000 as a result of high taxes and a weak euro. In fact, the affordability of tobacco has not changed greatly in the past ten years, while cigarette smuggling has halved. Tobacco smuggling is weakly affected by price.

If smuggling is only "weakly affected by price", it would be interesting to know what the real reason is for people buying and selling contraband tobacco. Maybe they just do it for a laugh. Why does Ireland, Britain and Canada have the worst smuggling problems if not for the fact that they have the highest prices? How much tobacco is smuggled from high tax countries to low tax countries? None at all because the whole point is get a cheaper price.

Contrary to the BHF's glib assertion, cigarettes have, in fact, become both more expensive and less affordable—the price has risen by about 90% since 2000. Inflation has risen by 30-40% in that time and although I cannot get precise figures on average wages, I am confident they have not risen by 90%. It should also be remembered that smokers are more likely to be on lower incomes, and the people who buy smuggled tobacco are likely to be on still lower incomes. Affordability measures based on median wages do not tell the whole story, despite both the heavy emphasis placed on them by both the anti-tobacconists and the temperance lobby.

Secondly, notice that the BHF uses the peak of tobacco smuggling (2000) as their baseline. According to HM Revenue and Customs, the illicit cigarettes made up 11% of the market in 2009/10. This is a decline since the 21% peak of 2000, but BHF make no mention of the illicit rolling market, which continues to make up half of the entire rolling tobacco market. Nor do they mention counterfeit cigarettes which were hardly ever seen in 2000, but which are a major problem today.

As I wrote at the ASI recently, the connection between price and tobacco smuggling has not gone unnoticed by customs officials in Ireland who have spotted the Laffer curve that has taken shape as prices have risen.

Initially, tax rate rises do increase tax revenue, however beyond a certain point tax rate rises may actually start to decrease revenue. The main causes for such decreases are that high levels of taxation either cause economic activity to reduce (the disincentive effect of higher taxation) or economic activity to switch to the shadow economy.

This is all pretty obvious stuff unless you happen to be an anti-smoking campaigner, in which case the laws of economics that apply to ever other product can be rejected as tobacco industry propaganda.