The TaxPayers’ Alliance savages George Osborne’s 37p rise in cigarettes

Hat tip Dick Puddlecote.

National treasure The TaxPayers’ Alliance have produced their usual erudite take on the UK’s budget for 2012. They launch a devastating critique on the 37p rise in taxation on a packet of cigarettes, confirming the criminal classes will be toasting George Osborne the Chancellor of the Exchequer.  Here is Matthew Elliott and Matthew Sinclair at their very best.

http://www.taxpayersalliance.com/budget2012.pdf

“Contributing to the illicit trade in cigarettes

The Chancellor decided to increase the duty on tobacco by 5 per cent above inflation.
Tobacco duties are probably the single most regressive taxes there are, disproportionately
affecting people on lower incomes. For many smokers it will account for all or most of the
saving from the decrease in direct taxes between 2011-12 and 2012-13:

This is not the first time that tobacco taxes have been increased substantially above
inflation, but such tax hikes can increase the trade in illicit substitutes. A World Health
Organisation report in 2004 found that:

In 1998 and 1999, taxes increased by 5% over inflation, but revenues declined because of
continuous growth in smuggling. By 1999, the revenue lost through tobacco smuggling was
estimated to be about 25% of all tobacco revenue.
Another study in 2004 found that the tax avoidance response to tax changes is at least
twice the consumption response. That is the equivalent of two people simply switching to
the illicit market for every one person who stops smoking because of higher prices.
This is a serious problem in other countries, too. In the 2010 Irish Budget, the Minister for
Finance Brian Lenihan froze the duty on cigarettes. He outlined in his speech why:

I have decided not to make any changes to excise on tobacco in this Budget because I
believe the high price is now giving rise to massive cigarette smuggling. My responsibility as Minister for Finance is to protect the tax base. I have full confidence in the effectiveness of the current multi‐agency approach but early in the New Year I want to explore what further measures we may need to stem the illegal flow of cigarettes into this country.

That was a frank acknowledgement that the high duty on cigarettes had not necessarily
curbed consumption but had led consumers to purchase substitute illicit goods instead.
Gabler and Katz carried out a study in Canada in 2010 and their findings were stark:

Contraband cigarettes are perceived to be a near‐perfect substitute for lawfully purchased
cigarettes. As such, contraband tobacco use neutralizes the deterrent effect of higher taxes.
When taxes on cigarettes were increased in 2002 in New York City, the combined state and local taxes were $3 a pack. But during the four months that followed, sales of taxed
cigarettes fell by 50 per cent compared to the same period the previous year.

It is not plausible that this was due to a fall in the number of smokers; again it suggests that the measure was a considerable boon to the illicit market.”

World Health Organisation Taxation of tobacco products in the WHO European Region: practices and challenges, 2004
6Brian Lenihan T.D. Financial Statement of the Minister for Finance, 9 December 2009Gabler, N. & Katz, D. Contraband Tobacco in Canada: Tax Policies and Black Market Incentives, Studies in Risk and Regulation, Fraser Institute, 2010

Fleenor, P. Cigarette taxes, black markets, and crime lessons from New York’s 50-Year losing battle, Cato Institute Policy Analysis number 468, 2003