Cigarette smokers are no longer the tax piggy bank they once were — something that UK chancellor John Healey might regret ahead of his tricky Budget presentation next week.
In many developed countries, duties are now so high that total receipts have fallen: smokers have quit and value has also leaked to the black market. Australia is a good example. Home to the world's priciest smokes at the equivalent of around £31 per pack, it reckons four-fifths of its tobacco is now smuggled. In the UK, where a premium pack costs roughly £20, industry studies reckon the black market to be almost half the total.
On top of declining smoking rates — the percentage of smokers in the UK and Australia has fallen by almost two-thirds this century to under 10 per cent — that translates into dwindling fiscal income. Cigarettes account for less than 1 per cent of UK tax receipts.
If tobacco taxes were like other duties, now would be the time for politicians to dust off their economic textbooks and read up on the Laffer curve. This posits that raising taxes too high is counter-productive because it will change behaviour and lower the government take. A group of Australian senators recently recommended tax cuts on cigarettes to help counter illicit activity. But for a sin tax like tobacco, the Laffer curve is only one consideration. When the goal is also better health, government revenue becomes a secondary objective. Better to crack down on the finances of the bootleggers than their customers.
Source: Financial Times Companies · Summarized by HeadlinesBriefing