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.

UK Tax System and the Beer Duty Escalator

For those of you who don't have a clue about the UK Tax System (including most of the occupants of these Sceptered Isles) see here, there is a report by the IFS (Institute for Fiscal Studies - ed)  that has some interesting graphs (when he writes the word 'interesting' - it is worth noting that this not necessarily the word others might use for the piece of information that he is about to purvey - ed)  and is a good read if you want to get a grasp about how 'Da Government' (tm) tax us.

One graph (of the many - ed) that stands out for me, is the one that refers to the 'Excise Duties' on page 53. This shows a graph of total indirect taxation (VAT and excise duty) as percentage of the retail price (beer, wine, spirits, cigarettes (Sin Taxes), also on petrol and diesel.

Now I was under the impression that the Chancellor with his beer duty escalator was ramping up beer taxation but it is not obvious from this first graph. However, looking at Figure 5 on page 54 makes it quite clear that it has been going up more than inflation i.e. in 'real terms' in recent years. So all you beer lovers, sign up for the Stop The Beer Duty Escalator e-petition on the No. 10 website.(You could argue that it is still lower than it was in 1988 - ed)

It is noteworthy (really - ed), that the tax on fuel is made up of a fuel duty (tax) to which is then applied VAT (tax)! So a tax is applied to a tax! Nice graph showing that this is so.