The Truth about Tobacco Taxes

I am not going to drive up the traffic for someone with a clear intent on trolling the internet with disinformation, so I am not going to post a link here, but there is an story on the website called Hotair (right, the name is telling enough) about how the World Health Organization (WHO) is pushing a tobacco tax agenda. The story is prejudiced, but the prejudice clearly shows and most readers are likely to figure out soon enough that the writer has an axe to grind. (By comparison, even the Tax Foundation’s story from last year on the same topic reads much more balanced). However for the sake of truth and to crowd out the disinformation from the internet, I could not help point out why what’s peddled for sound logic in that story is in fact – in politer terms – faulty logic.

Here is the TLDR (too long didn’t read, if I must) version of the story’s thrust. That high cigarette taxes are responsible for the illicit trade in tobacco. But before I go into what causes the illicit trade in tobacco in the first place, a little bit of background.

Tobacco is the single most preventable cause of death in the world by far, causing as many as 6 million deaths every year. The WHO launched the Framework Convention for Tobacco Control (FCTC) back in 2005 to curtail this public health problem. The FCTC has been hugely successful in reducing global tobacco consumption, largely through a combination of supply as well as demand reduction strategies. As as result, today in many parts of the world, illicit tobacco is now the main source (57% in New York City for example) of tobacco consumption. In fact, curbing the illicit trade in tobacco may save up as many as 160,000 additional lives and increase revenues by about 31 billion dollars.

But illicit tobacco trade did not go up in absolute terms in most parts of the world because of high taxes or the FCTC. Research shows, illicit tobacco trade is directly a function of poor provision or lax implementation of laws to curb such trade. Places around the South China sea for example, like China and Malaysia have a huge illicit tobacco trade because it is easier to get away with illicit tobacco trade. In contrast, countries like the UK, which have very high tobacco taxes have been able to curb tobacco consumption as well as the illicit tobacco trade due to strong laws against illicit tobacco trade.

The data clearly shows, there is no clear relationship between high tobacco taxes and increase in illicit trade. Of course there are issues with differential tax rates within a close geography like the US. Differential tax rates have indeed been responsible for the increase in interstate smuggling of tobacco in the US. An article I wrote a while back dwells on this a little. But the way to reduce that is to harmonize taxes, much like the EU has managed to do.

Balanced discussion of this issue are made on this World Bank blog, and a paper on the MMWR from the CDC. Of course, supply reduction strategies like taxes aren’t the single solution to the problem of of tobacco consumption, and he FCTC recognizes that. The way to go about his problem is to make tobacco smoking “uncool” for the kids, to educate the public on the harmful effects of tobacco and to make it really hard for people to lay their hands on to tobacco by means of excise taxes and reducing illicit tobacco that makes tobacco cheaply available for people. If the WHO “Protocol to Eliminate Illicit Trade in Tobacco Products” is ratified, it will be a significant achievement in reducing the menace of tobacco – something that earns the unique distinction of being completely legal and at times even promoted by governments despite the overwhelming evidence that it is literally the most pervasive poison for people’s health.

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