Study: Tax increases do not drive illicit trade

Repeated and significant increases in tobacco taxes are recognized as the most effective lever for reducing tobacco consumption in a population. However, cigarette companies systematically oppose this anti-smoking policy, notably by putting forward the argument that it would lead to an increase in illicit trade. In a study published in the journal Tobacco Control, researchers sought to measure illicit trade, before and after tax increases, in the following countries: Georgia, Brazil, South Africa, Colombia, Mongolia, Gambia and Vietnam. The study highlights the following four points: :

Industry estimates lack transparency and reliability

The study highlights a quasi-systematic and significant gap between the estimates provided by independent studies and those provided by the tobacco industry, whose methodologies generally remain opaque. In 2016, the tobacco industry's estimate was six times higher than that given by independent studies conducted in Colombia. The reason for the overestimation of illicit trade is simple: it serves to dissuade the authorities from increasing the tax burden on tobacco products.

The role of the geographical factor is not always decisive

The researchers showed that in Vietnam and Georgia, border towns were more vulnerable to illicit trade than others. However, this finding is not a rule, since data collected in Mongolia showed that the opposite phenomenon was observed. In particular, the province of Bayan-Ölgii, close to the Chinese and Russian border, saw illicit trade decrease after a tax increase between 2017 and 2018. It was shown that illicit cigarette packs came mainly from Korea and Ukraine, respectively 2,650 and 5,250 kilometers away.

The impact of tax increases on illicit trade is residual

In January 2016, Vietnam decided to increase the tax on a pack from 65 to 70% of its ex-factory price. The share of consumption of illicitly traded products in total consumption fell to 14% in 2017, compared to 21% in 2012. According to the researchers, tax increases are not determining factors in explaining illicit trade. The socio-professional situation of individuals is relatively more determining in explaining the phenomenon. However, while in Gambia the purchase of illicitly traded products is more likely to be made by older, rich and single men, smokers likely to buy these same products in South Africa come from disadvantaged backgrounds, with a low level of education and unemployment.

Weak tax administration as underlying cause of illicit trade

The researchers show that South Africa saw an increase in illicit trade between 2009 and 2014, from 5 to 17% of the national market, at the same time as the administration's capacity to carry out its missions declined, and smuggling investigation units were disbanded. Conversely, the study highlights that in Georgia, reforms of the tax administration, reductions in corruption and the implementation of technological solutions to detect contraband products have led to a significant decrease in illicit trade. However, the country has regularly increased taxes on tobacco products, in preparation for future integration into the European Union.

Ultimately, the study tends to demonstrate that tobacco tax increases have not been characterized by a significant increase in illicit trade. The researchers recall the importance for public authorities to follow the recommendations established by the Protocol to eliminate illicit trade in tobacco products. In particular, the fight against illicit trade requires the establishment of a monitoring and tracing system that is directly and indirectly independent of the tobacco industry.

This news comes from the following article:

Priscilla Tiigah and Erika Dayle Siu, Tobacco Control, Illicit Tobacco Trade not exacerbated by tobacco tax increases in low & middle income countries, research shows, 10/15/2020, consulted on 10/21/2020

Keywords: Taxes, Illicit Trade

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