The Laffer Curve in action

One aspect about fighting the anti smokers is the broad range of subjects that one has to learn. Whether it is the crash of the Pub Companies share price post UK smoking ban, reading about genetic mutations that cause lung cancer, epidemiological studies through to sociology and psychology, the reading is endless. It is back to economics today and the Laffer Curve. The Wikipedia entry seems very accurate. Named after  economist Arthur  Laffer, “in economics, the Laffer curve is a theoretical representation of the relationship between government revenue raised by taxation and all possible rates of taxation. It is used to illustrate the concept of taxable income elasticity (that taxable income will change in response to changes in the rate of taxation).

“The term “Laffer curve” was reportedly coined by Jude Wanniski (a writer for The Wall Street Journal) after a 1974 afternoon meeting between Laffer, Wanniski, Dick CheneyDonald Rumsfeld, and his deputy press secretary Grace-Marie Arnet.”

This article from the Financial Times shows the futile efforts of UK Customs, Her Majesty’s Customs and Revenue (HMRC) to stem the tide of legal and in this example illegally traded tobacco. Excuse the cut and paste but it is very well written.

The ever excellent Chris Snowdon also writes a piece for the Adam Smith Institute where the Irish government admit that high taxation is reducing revenue.  The FT.

http://www.ft.com/cms/s/0/3d6c0676-2bd5-11e1-b194-00144feabdc0.html#ixzz1i6hFG4Ug

“The working-class Harehills neighbourhood in Leeds is an unlikely crossroads for global criminality – a jumble of down-market stores, pungent take-aways and immigrant-owned mini-marts featuring adverts in Arabic and Polish. But behind a false wall in one local shop, past the halal meat counter, lies a stash of some 10,000 untaxed cigarettes from eastern Europe – a modest slice of the illicit tobacco market flourishing throughout Britain and the EU.

“I’d guess that over half the cigarettes smoked in Harehills are illegal,” said an officer from HM Revenue & Customs, which recently conducted several raids in the area. “Sometimes, after a bust, all we have to do is drive round the block, come back and they’ve already re-supplied.

One shop owner, a stout man in his thirties with gelled, jet-black hair, is part of the local tobacco underworld. Originally from northern Iraq, he is on first-name terms with some of the officers from HMRC’s local Inland Enforcement team. During the past year his modest convenience store has been targeted many times.

“Here the duty is so much – if I buy British Marlboros I may sell five or 10 packets a day,” he said. “People here have no money, they’re not working, so we get Marlboro for £3 from Poland – it is not just here, it is the whole area.”

The trade in illicit – untaxed – tobacco has recently become the fourth-largest global tobacco business by volume.

“If taken in its entirety the illicit trade is only behind BAT, Philip Morris and Japan Tobacco worldwide,” said Michael Prideaux, director of corporate affairs at British American Tobacco. “It represents anything between 6-12 per cent of global volume, so between 330bn-660bn cigarettes a year.”

Although tobacco companies do not disclose how much they lose from the illicit trade, Philip Morris International, the world’s largest tobacco company by sales, said it is “significant”.

“Illegal tobacco broadly is now a large portion of the global market,” said Peter Nixon, vice-president of communications at PMI. “Our price structure varies country by country based on local tax levels, so the losses to us are a significant concern.”

A combination of government duty increases and economic depression is set to make the problem worse, according to the industry, depriving companies and national exchequers of billions of dollars in revenue.

“The drivers are price and taxes. Before the 1990s you didn’t see that much globally, but since then we’ve seen tobacco taxes around the world go up so there’s more incentive for smugglers,” said Mr Nixon.

The EU, with its porous borders and large, varied markets, has seen some of the steepest growth in illicit trade. In 2010, according to PMI, one in 10 European cigarettes smoked – 64.2bn – were either untaxed or made of counterfeit tobacco, a rise of nearly 2 per cent, or 8bn illicit cigarettes, since 2006.

While the UK average for consumption of illicit cigarettes is about 10 per cent of the total, in London it has risen to one in five and in cities such as Nottingham and Ipswich one in three. As for roll-up cigarettes, PMI estimates that half of all loose tobacco in the UK is illicit.

Part of the problem is stigma, or the lack of it. The steady increase in the cost of smoking has seen young professionals increasingly buying under the counter.

“If you look at price differentials between Ukraine, Russia and Belarus, which have packs in some cases below one euro, and then the UK where a pack of Dunhill or Kent is around £8, the profits that can be made are just so vast,” said Pat Heneghan, BAT’s global head of anti-illicit trade. “Given the differentials of tax and price [the problem] will get worse before it gets better.”

Back in Harehills, the HMRC squad found some 24,000 illicit cigarettes during a day’s work, equating to a tax loss of more than £9,000. It is a fraction of the estimated £2bn lost every year to tobacco smuggling, according to the government.

The convenience store owner, however, appears undeterred. Planning his next trip to Poland, he said he is selling the van he previously used: “I want a truck.”

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3 Responses to The Laffer Curve in action

  1. I noticed something that the article does not address at all. While the loss in taxes might be significant, what about the human cost? What other please doing with the people they find involved with the smuggling? Are Britain and Ireland going to have to build new jails to house all of these new criminals?

    –MJM

  2. Our little shopkeeper that buys from Poland buys legitimate EU Duty Paid cigarettes …. that originate from these tobacco companies so no profit lost to them.

    All the seized tobacco and cigarettes seized at our ports and airports are replaced by ‘smugglers’ by purchasing more. For every carton of cigarettes and pouch of tobacco seized is another sale for the tobacco companies … so no profit lost for them.

    For all the duty free cigarettes and tobacco smuggled is profit for the tobacco companies.

    The counterfeit trade is very small but all the rest are legitimate products from these tobacco companies. lt matters not to them where their products are bought … it’s all profit.

    Even the massive influx of such brands as Jin Ling cigarettes from Kazakhstan is profit for tobacco companies as they supply the tobacco to make them.

    So please, no crocodile tears from tobacco companies, thank you.

    @Michael

    The UK uses Civil Law to seize tobacco and cigarettes. This makes it very easy for the UKBA to seize (regardless whether the goods are seized from innocent legitimate shoppers or smugglers). You cannot be prosecuted as a smuggler under Civil Law, for that you would have to use Criminal Law (PACE) and that would have a direct effect on the amount of seized goods. The amount of goods seized would vastly reduce as UKBA would have to have actual evidence and UKBA definitely don’t want to do that. Giving cross-border shoppers actual rights is the last thing UKBA would ever want. The UKBA prefer the kangaroo courts.

  3. Thanks for the info Smoking Hot! Interesting that they can get away with that.

    Of course if they ever DO get smuggling under control they’ll simply be opening up a whole new can of worms: GYO folks with “tobacco gardens,” or, if those get outlawed, then greenhouses in their basements. It’ll be bathtub gin time all over again.

    – MJM

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