Cutting tax would not reduce smuggling: letter to FT
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The Chancellor will be gravely disappointed if he expects the realfreeze on cigarette duty to help control cigarette smuggling [inflation-onlycigarette tax rise may be repeated, 9 March]. Even the deep cut favoured by the tobacco industry would be ineffectivein tackling smuggling – though it would certainly raise consumption, cause moreill-health and reduce Treasury revenue.
It may seem paradoxical that deep duty cuts would not help reducesmuggling, but this is because the dominant form of cigarette smuggling -around 80 percent – is not cross-Channel bootlegging, but large scale”transit fraud” involving millions of cigarettes on which no duty hasbeen paid. The bootlegger profits fromthe difference between Belgian and British duty and would be sensitive to aBritish duty cut. However, thelarge-scale smuggler profits from the difference between the duty-paid anduntaxed transit price, taking a much larger profit than the bootlegger withless sensitivity to duty changes. Thisis the reason why Spain and Italy have had high levels of smuggling, but withmuch lowers levels of tax than Britain. What matters to the large-scale smuggler is a ready-made illegaldistribution network for millions of contraband cigarettes – and this is nowwell and truly in place in Britain.
While the effect of a deep cut in tobacco duties could be sufficient tokill off cross-Channel bootlegging, the petty criminal distribution networkswould simply be supplied by increased transit fraud – meaning a change in thestructure, but not the size, of the illegal market.
The most important question, to be answered by both tobacco companiesand HM Customs and Excise, is why so many billions of cigarettes are exportedfrom the UK to countries in Eastern Europe, the Balkans and Africa, where therethey are not widely smoked, and the most obvious customers are criminal gangsthat will illegally re-import them to the UK. Until exports that facilitate organized crime are stopped, thegovernment will continue to fail to meet its targets to reduce tobaccosmuggling.