The problem if you tax something too much

I support an excise tax on tobacco, for two reasons. One is to cover the costs to taxpayers of health costs of smokers.  Unless we ban smokers from the public health system, then that is economically sensible.

I also think increasing the price does help people stop smoking, and most smokers do want to stop – it is highly addictive.

However there comes a point at which putting the tax up so much causes unintended consequences, such as increasing black market sales. And while minor in NZ at this stage, black market sales of tobacco actually has been found by the Centre for Analysis of Terrorism to be a significant funder of some terrorist groups.

A story in the Guardian notes:

So how can governments cut off terrorists’ cash flows? Illicit markets and petty crime flourish in the poor neighbourhoods of Paris and Brussels. In Paris, several northern neighbourhoods close to where some of the November attacks occurred have large-scale markets where illicit products are sold, yet French police choose not to prioritise such small-scale crimes. Indicative of this is that France, according to recent KPMG research, is No 1 in Europe in the illicit cigarette trade, with 9bn counterfeit and contraband cigarettes imported in 2014, placing France far ahead of Germany and UK in both actual and per-capita imports. …

A terrorist involved in the attack on Charlie Hebdo had traded in counterfeit trainers and cigarettes. Amedy Coulibaly, who slaughtered people at the kosher supermarket, had an extensive violent criminal record, and the thwarted attacker of the Thalys train was a long-term small-scale drug trafficker.

And it is not just in France. The KPMG report found the following groups were profiting from the black market in tobacco:

  • Hezbollah (but operating in North Carolina)
  • Al-Qaida
  • ETA
  • Islamic State
  • IRA

If you ban a product, or tax it too highly, the incentives grow for the black market. Has been that way for thousands of years.

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