Is it time to stop taxing smokers?
It is estimated that one in 10 cigarettes smoked in Europe is either counterfeit or contraband- that’s two cigarettes for every standard packet of 20. Figures for in 2010 showed suggested that some 64 billion counterfeit and contraband cigarettes were consumed in the EU and in some countries this figure may be higher. Almost one in every five cigaretters smoked in Ireland could be smuggled or counterfeit and Lithuanians could smoke as many as four illicit cigarettes out of every 10. Germany, France, the United Kingdom and Poland account for more than half of the total EU consumption of contraband and counterfeit cigarettes.
So why is this black market trade of tobacco a growing problem in the European Union? Cigarettes are among the most illegally trafficked goods in the world. They are easy to transport and offer an attractive risk to reward ratio for criminal organisations. Let’s look at the numbers- it costs approximately 20 cents to make one packet of 20 illicit cigarettes - which means that one container of 10 million smuggled or counterfeit cigarettes only costs around $100,000, giving a likely profit per container of over $2,000,000 .
But one of the major causes of illicit trade in tobacco is excessive tax hikes. If sin taxes on cigarettes are increased above consumers ability to pay, and let’s face it, who can afford to smoke nowadays, rather than the Treasury coining it in, or people gving up smoking, the black market booms. Take Ireland,, for example, where the steep excise duty increases during 2000-2009 did not provide any increases in tax revenue eand showed little drop in tobacco consumption but cigarette smuggling increased from 8 per cent in 2005 to approximately 25 per cent of the market in 2009.
And funny fags are massive in some areas of Europe. In Germany, for example, Jin Ling now ranks ninth in the list of all cigarette brands preferred by German smokers, despite the fact that Jin Ling has no legal market in the country. The European Commission estimates that member states lose up to €10bn in tax revenues a year, with France losing at least €2bn, the UK more than €3bn and Poland some €1.5bn.
Daniel Witt,president of the International Tax and Investment Centre research foundation thinks that one way governments can combat the problem is to make sure that they have a balanced tax policy, and one shared between EU neighbours:
“When setting a tax rate, administrations should take into account a number of factors - including the level of economic development, consumer purchasing power and tax rates in neighbouring countries,” he said. “A comprehensive governmental approach needs to include a strong political desire to address the many different aspects of the problem, as well as a commitment to ensuring that there is adequate financial resource available.”
What about the UK?
No-one would argue that, in the UK, the penal nature of the extortionately high excise duties on tobacco is intended to act as a deterrent. But these same excise duties also bring in some 9.144m a year (in 2010/11), a sizeable wedge for the Treasury, given this sum dwarves the receipts from Inheritance Tax and Capital Gains Tax at £2.7m and £3.6m respectively, and is more than the duties on beer, wines and spirits combined. Surely the Government would be loathe to lose any of this income by lowering the rates?
However, the Government was forced to rethink its plans in 2000, after the introduction of a 3% annual tobacco duty “escalator” 1993, increased to 5% annually in 1997, saw the level of tobacco duty tax avoidance in the UK soar to 28%. In 2000 the Government’s Tackling Tobacco Smuggling strategy and a range of other anti-smuggling initiatives were launched.
Could it be that the tax on fags has again reached tipping point and the Government should lay off taxing smokers? Or do you think the daft old smokers should be taxed into oblivion and hung out to dry if caught smuggling?