The European anti-fraud agency OLAF has recently announced that between 2009 and 2013 the European Union (EU) lost €700 million in taxes as smugglers cross into Spain to sell cigarettes at half the prices.
Two hundred Marlboro in Spain are €47, compared to €18.50 in Gibraltar. However, it is trivial compared to the estimated €10.9 billion lost throughout the EU, with 10 percent of all EU cigarettes being illegal.
The irony is that many British visitors see Spain as a cheap place to buy cigarettes. By comparison the UK price is an eye watering €120. Between 2006 and 2011, the amount of tobacco imported into Gibraltar tripled and organised crime has exported it to the mainland. It is also one of the pretexts for Spain to hold time-consuming searches of Gibraltar cars in their attempt to pressure the British government into relinquishing control of the territory.
The authorities both sides of the border have been hand-wringing under the mantra that something must be done, however much of it may well be in vain.
The World Health Organization and its Framework Convention on Tobacco Control, a treaty that the UK and the EU are signatories to, oblige governments to raise taxation on tobacco. In November 2012, it wrote: “Increasing tobacco taxes generally further increases government revenues, as the increase in tax normally outweighs the decline in consumption of tobacco products.”
Spain is no doubt encouraged to raise taxation to help prop up its deficit and Euro-addled economy. The unintended consequences of tobacco taxation are mimicked elsewhere worldwide. As taxes are increased, it becomes lucrative to avoid or evade taxes as described by economist Professor Arthur Laffer and his eponymous curve.
The highest rate of tax on cigarettes is in Ireland. Unsurprisingly the country has an epidemic of legal and illegal tobacco importation. It is, for now, entirely legitimate to go to another country in the EU and bring back as much tobacco as you like as long as it is for personal consumption and not for resale.
It is estimated however that 27 percent of all tobacco and cigarettes in Ireland are consumed free of duty €556 million is lost to the Irish treasury, with some quite unwholesome terrorists involved, The Irish Retailers Against Smuggling hold the Provisional IRA, the Real IRA, the Continuity IRA and the INLA responsible, stating that “criminal gangs are making €3 million per week from illegal tobacco trade.”
Worldwide, Action on Smoking and Health (ASH) Scotland accuse the Taliban, al-Qaeda, Hezbollah, the Kurdistan Workers Party (PKK)… the Columbian FARC… and the Chinese Triads.” I am sure it will not be long before ISIS is involved.
In New York, as reported previously, it was discovered that high prices meant that only 19.4 percent of cigarette packs were legally purchased with local taxes paid.
Canada in 1995 nearly saw the trade disappear as this paper from the Fraser Institute outlines. Unwisely the anti-smokers in 2000 pushed for higher taxes and like Ireland has a 27 percent saturation of illegal tobacco.
Smuggling is not a victimless crime. Retailers suffer as do legitimate tobacco manufacturers. In fact, in Australia and other places tobacco companies employ their own agents to find stores who are selling illegally.
The implication for plain packaging is more than implied. Illegal contraband sales are up from 13.3 percent to 13.9 percent of the market in Australia in the first year
The whole racket seems to have an American prohibition feel about it, with large sections of society willing to be criminal as smugglers save them taxes. The anti-smokers are the most guilty in pushing increases in taxation to reduce consumption.
Smoking is, economically speaking, inelastic. There is little reduction in consumption in response to higher taxes. Governments and anti-smoking advocates have largely created the problem themselves, eager to tax and spend, and they have passed the Laffer Curve and will see only diminishing returns.
The law of unintended consequences are wholly observable.