Tobacco taxation and smuggling

I am having a field day with this IFS report 'A Survey of the UK tax system'  and am now moving on to tobacco taxation and smuggling.

Is there a link? My gut feel (no - that feeling is a need for food and another cup of tea - ed), is that there should be... the higher taxes go up on tobacco products - the more smuggling is bound to occur. As an aside I would argue that as the price goes up legal consumption will  go down as people give up due to the expense (price signals - economics ed).

Research shows that tobacco smuggling accounts for approx 46% of all hand rolled tobacco and approx 10% of all cigarettes consumed in the UK - see page 1 of this report by ASH. Just wonder how accurate their figures are  (You can see the ASH investigators targetting smokers with free tobacco products if they agree to take part in an anonymous survey - ed)  What ASH conclude is that £1.1-3 bn is lost per year to the Chancellor over recent years due to smuggling.

This figure appears to be in the right arena, as numbers given by the Tobacco Manufacturers Association (TMA) here show. What is very noticeable is that the value of total smuggled tobacco, i.e. potential revenue lost to HMRC, according to the TMA, has been going down in value terms since their figures began in the 2000-1 time frame (or there estimate of the illegal trade is off the mark? - ed)

Wonderful (no - ed) report by the ONS for 2008-9 here gives a thorough investigation into smoking, who, what, why etc and another more wide ranging one covering general household expenditure including smoking here.


However, the TMA is very worried about the rise of smuggling as is shown by these slides discussed at the Anti-Illicit Trade Summit of 2011 and also in this talk. The TMA's beef (horse meat - ed) may, to my mind, be more that a large proportion of the smuggled goods are counterfeit, up to 13% according to their latest estimate. Which they don't make any money from and will damage their brands!

I was hoping to nail the fact that as the price goes up, so does smuggling, but I cannot find any figures that satisfy that hypothesis. All I can say is that hand-rolled tobacco consumption has increased significantly as cigarette consumption has gone down. 

More Facts and Figures

The real increase in taxes on cigarettes over the past 30 years is enormous over 250%.

The tax take on tobacco related products is in the region of £11bn and makes up around 78% of the price of  a packet of 20 cigarettes in 2012.

Legalization and Taxation of Currently Illicit Drugs

So now I wonder if illicit drugs, class A, B and C drugs, were both legalized and taxed, what that would the tax take be? Currently, all of these are effectively tax free, not exactly something 'Da Government' (tm) would want to advertise I would think.

There is quite an interesting (it's that word again - ed), report by the Home Office, 'Seizure of Drugs in England and Wales in 2010/11' shows statistics for the number of seizures by the police and the Border Agency not only over 2010/11 but over the last 10 years, unfortunately doesn't give the value of the seizures, the so-called 'street value', so a little more research is required (pause for research - ed)

Another Home Office sponsored report, 'Illicit Drug Trade in the United Kingdom'  gives a value of  £4-6.6 bn based on 2003-4 figures. Which means if the price of illicit drugs went up with general price inflation, using HMT GDP deflator to calculate it, would today (2013 - ed) be worth between £4.6-6.9 bn.

Now assuming (quite a few things -ed) that they would be sold for the same price and this is a big if and that the taxation rate was the same as cigarettes, (assuming Da Government' (tm) would want to discourage it and so would tax it in the same manner) and assuming that consumers would not pay any more for it (i.e the cost of the finished product pre-tax would drop substantially, say to be on a par with tobacco). With a large finger in the air, and it waving wildly, it could  potentially be worth £3.7-5.55 bn  a year in forgone taxes. (This seems a little on the high side, as fingers in the air estimates go - ed)

Given that 'Da Government' (tm) raised approx £11bn last year on the taxation of tobacco products, it seems that legalizing and taxing drugs could bring a significant tax revenue and free up large numbers of police and border staff to do other things?

Given that 'Da Government' treat both tobacco and alcohol as health issues (and BTW raise large amounts of money from us), why are they not doing so with illicit drugs? (it's the politics - ed).