Tobacco Taxation in the European Union:
Conceptual and Empirical Limits
Sijbren Cnossen
Maastricht University
CPB Netherlands Bureau for Economic Policy Analysis
Is Tobacco Consumption Bad for
Your Health?
Aspect Consortium
…smoking is a deadly disease
…killing 625,000 people (one in seven of all
deaths) each year in the EU
…and involving gross social costs of 1.04%
to 1.39% of GDP
Who should pay for these costs and how?
Should Smokers Pay for Social
Costs through Separate Excises?
Yes, but only insofar social costs represent
external costs (see below)
PS. Are separate excises justified for
revenue purposes?
- low collection costs
- few distortions (inverse elasticity rule)
Arguments not persuasive; also, equity
concerns
What Are Social Costs?
WHO: social costs are everything that
happens in a world with smokers that does
not happen in a world without smokers
In short: every cigarette is bad for people’s
health; accords with WHO’s health
intervention policy
Social costs (benefits) = private costs
(benefits) + external costs (benefits)
External Costs not Social Costs
Should be the Benchmark
WHO’s philosophy conflicts with consumer
sovereignty principle which prescribes that
only external costs (i.e. costs imposed on
others) are relevant for policy analysis
This is known as John Stuart Mill’s harm
principle
John Stuart Mill’s Harm Principle
“On Liberty” published in 1869:
“If gambling, or drunkenness, or incontinence, or
idleness, or uncleanliness, are as injurious to
happiness…as many or most of the acts prohibited
by law, why (it may be asked) should not
law…endeavour to repress these also?”
Consumer sovereignty principle only applicable to
rational, fully informed individuals
What Are External Costs?
Kinds of costs:
- financial
- physical
- psychological
Which costs are not external?
Cost savings should be taken into account:
only net costs are relevant for policy
analysis
Do Tobacco Excises Pay for External
Costs?
Manning et al. (1989)
- gross costs: 43 (66) dollar cents
- net costs: 16 (25) dollar cents
Lightwood et al. (2000): gross costs 0.11.1% of GDP
Barendregt et al. (1997): net costs negative
Conclusion: smokers appear to pay their
way in high tobacco excise countries
Do EU-Agreed Tobacco Excises
Approximate External Costs?
Minimum duty €64/1000 cigarettes on
MPPC: €1.28 per pack of twenty
Specific rate: 5-55% of retail price
Total excise duty burden 57% of retail price
VAT at standard rate
Conclusion: answer depends on level of the
excise duties
How High are Tobacco Taxes
in the EU?
United Kingdom: €5.88 tax per pack of 20
cigarettes (of which €3.01 from specific
rate); retail price €7.43
Spain: €1.76 tax per pack (of which €0.16
from specific rate); retail price €2.25
Tax differential is €4.12 per pack and price
differential €5.18 or €0.26 per stick!
Do Smokers Pay Their Way
in the EU?
Yes (and perhaps more than that) in high
tobacco excise duty countries
Perhaps not in low tobacco excise duty
countries
High or low excise duty should be
expressed in absolute (not relative) amounts
Differences Between Specific vs.
Ad Valorem Excises
Specific rates
Reduce relative price
differences
Promote quality
Promote expensive
tobaccos
Favor American
blends
Ad valorem rates
Increase absolute price
differences
Discourage investment
in quality
Promote cheap
tobaccos
Favor cheap homegrown tobaccos
Should Tobacco Excise Duties be
Specific or Ad Valorem?
External costs independent of price at which
cigarettes are sold, so internalization of
external costs favors specific over ad
valorem taxation
Fortunately, relationship between smoking
and external costs largely linear, so average
uniform excise duty can be levied
Ad valorem taxation confined to VAT
How High Should Cigarettes be
Taxed?
Conceptual limit: not higher than level of
external costs
Empirical limit: not higher than can be
enforced (doubtful for predominantly
specific taxes up to 300% of pre-retail price
vs. 19% VAT)
Tobacco taxes in EU twice as high as in US
Bootlegging and Smuggling
Definitions
- bootlegging: purchase of cigarettes in low-tax
countries in excess of indicated cross-border
shopping allowances
- smuggling: purchase of cigarettes without
payment of duty (includes duty-free shipments
between EU Member States which are
subsequently diverted to illegal market)
What is Extent of Bootlegging and
Smuggling?
UK: one in five cigarettes is from the black market
Bootlegging and smuggling: 10 percent of
consumption in EU
Fifty criminal networks in EU
Smuggling worldwide: 6 percent of consumption
= consumption in the US
Double-digit smuggling as dangerous as doubledigit inflation
What Should be Done about
Smuggling and Bootlegging?
Smuggling is predominantly enforcement
issue: tighter border controls, cooperation
with producing countries, control of
manifests, prepayment of duty (?)
Bootlegging is predominantly excise
harmonization issue: approximation of duty
levels on the basis of specific rates
What About Specific
Problem Areas?
Youth smoking (information failures): best
tackled through wider dissemination of facts
about smoking and restricted availability of
cigarettes
Environmental tobacco smoke: best tackled
through smoking regulations in public
places
Conclusions
For high excises
Revenue
Protection of the
young (specific rate)?
Against high excises
Principle of consumer
sovereignty
Low net external costs
Equity aspects
Smuggling
Final Words!
Was ich noch zu sagen hätte, dauert eine
Zigarette …!
Conceptual and empirical limits to
excessively high levels of tobacco taxation