When societies grow opulent life becomes more precious
to the living. People have a good reason to want to live longer lives as more
of the promises of Paradise become Earthly. As a result, the ever growing body
of evidence of the harmful effects of tobacco products to human health has, not
surprisingly, been met with alarm.
Cigarettes, the most common tobacco product,
have been discovered to not only cause harm to the direct user, but also to
bystanders, as a result of so-called second-hand smoke. In response,
anti-tobacco advocates and governments have lead a three-decade long charge
which has seen smoking in most public places turn from familiar sight to a
thing of the past. Likewise, tobacco advertizing and the selling of tobacco
products to minors have become outright outlawed in North America and the
European Union (EU). Further, the EU has exerted pressure on candidates for
membership to adopt its laws regarding tobacco advertizing and smoking in
public places. As these measures failed at their stated goal on the one hand;
and as governments grew in need of more revenues to pay for social programs on
the other hand, a new approach was introduced in the War on Smoking:
Prohibition-By-Taxation.
While anti-tobacco activists have the best of
intentions in mind, through an application of analysis of the economics of
prohibition, this paper will demonstrate that prohibition-by-taxation is an
unwise course of action since it encourages organized crime in the form of
smuggling, fails to curb people’s tobacco consumption habits, and adversely
impacts low income communities. For these reasons government efforts to
dissuade people from consuming tobacco ought to be abandoned. Despite the
author’s awareness of dissenting arguments concerning the actual harmfulness of tobacco products, this
view will be completely ignored, for the express purpose of analyzing the effectiveness of
prohibition-by-taxation.
While prohibitions of goods
and services come about from a desire for social engineering, their failures
come about as a result of the unclear understanding of the nature of the
economics of prohibition. Austrian economist Mark Thornton, in his definitive
study on the subject explains that “[d]espite the heated debate little progress
has been made toward a theoretical understanding of prohibition. Economists and
other social scientists have spent much more effort on empirical investigations
and cost-benefit analyses than on theory” (Thornton 71). He goes on to summarize
the nature of prohibition.
Prohibition is designed to curtail the production,
exchange, and consumption of a good with the ultimate goal of extinguishing it.
While prohibition is an unusual and extreme form of government intervention,
its effects can be analyzed within the framework of other interventionist
polices such as taxation or regulation. Penalties such as fines, confiscation
of assets, and jail terms are established to discourage activity in the market.
Enforcement of prohibition requires the use of resources to make the penalties
effective in discouraging these activities. The diversion of existing
enforcement facilities may involve some savings but does not eliminate the need
for additional resources. The amount of resources devoted to the enforcement of
prohibition will (with a given penalty structure) determine the degree of risk
placed on market participants and therefore the effects prohibition will have
on production and consumption (Thornton 73).
Prohibition is an example of
government interventionism, which is in itself the antithesis of a free market.
“Interventionism is an alternative form of economic organization to capitalism
or socialism, a form that involves governmental control or direction of
resources that were private property” (Thornton, 79). Government planners see
prohibition-by-taxation as an incentive based approach to behavior control.
While correct in their assumption that consumers respond to incentives and
disincentives on the demand side, legislators and orthodox economists neglect
to consider the supply side of the issue. By contrast,
[t]he Austrian, or market-process, approach to
economic analysis … best exemplified in the works of Mises ([1929] 1977, [1936]
1951, 1922, [1949] 1977), F. A. Hayek (1937, 1945), and Israel M. Kirzner
(1973, 1985) … begins with the truism that human action is purposeful and aimed
at enhancing individual utility amid uncertainty and imperfect knowledge.
Economic development occurs through exchange, learning, entrepreneurship,
innovation, and the evolution of institutions. The market economy generates
solutions to social problems; for example, the introduction (or evolution) of
money reduces the transaction costs of exchange. The generation of such
solutions is a discovery process because it requires alertness to opportunities
and interaction between numerous individuals over time. The market-process
approach employs a multidimensional view of competition, whereas orthodox
economists often rely on simplifying assumptions, such as homogeneous products.
The market process approach reminds us that goods are subjectively evaluated by
individuals, who base their evaluations on many features of products (Thornton
77).
It is of utmost importance to
remember that the goal of excise taxes is to artificially increase the retail
price of the product targeted. Depending on the elasticity of the product’s
demand, there will be two most likely results in response:
1) If the demand for the product is highly elastic, then consumers are likely to turn to substitute products and abandon the targeted product. However, if the demand for the product was highly elastic to begin with, targeted excise taxation would not be necessary, as consumers could easily be persuaded to turn to substitute goods; and
2) If the demand for the product is highly inelastic, then the artificially increased retail price on the legal market creates opportunities for alternative—“black”—market activities. Tobacco products, due to their perceived addictive nature, tend to fall under the category of goods with highly inelastic demand.
The artificially inflated
price leaves room for profits sufficient enough to cover the additional costs
involved in smuggling, as well as to pay for the risk involved in undertaking
an illegal enterprise. In such a manner the government invites what it labels
as “criminal elements,” smugglers, to set up an alternative market in order to
satisfy the demand for tobacco products. “The elimination or control of a
particular economic activity produces profit opportunities that previously did
not exist. These profit opportunities will likely disrupt the plans of bureaus
and undercut the pursuits of regulators and government policymakers. The
severity of the intervention will determine the extent of these new (black market)
profit opportunities” (Thornton 82). In the case of prohibition-by-taxation of
cigarettes, the government sets the minimum legal price. Thornton calls this
approach the Wholly Superfluous Discovery Method. “[T]he wholly superfluous
discovery process is particularly relevant to prohibition. The profit
opportunities created by prohibition will result in new methods of production,
transportation, inventory, distribution, and marketing,” inducing sellers to
stay a step ahead of law enforcement (Thornton 82). One method often used by
smugglers to stay in business is corruption of the law enforcement and judicial
systems by means of bribery (Thornton 83).
To be sure, high excise taxes
have failed to reduce smoking. According to Hudgins, when Canada introduced a
large increase in tobacco taxation in 1991, the estimated profits that stood to
be made by smugglers were at $1 billion (not adjusted for inflation) (Hudgins
4). As a result, while previously only 0.02% of all purchased cigarettes were
estimated to be bought illegally, after the introduction of the new tax the
percentage of illegal cigarettes sold rose to an estimated 25 (Hudgins 3).
According to Lee “[i]t was widely reported that smuggled cigarettes made up
30-50% of the Canadian market. Taxable cigarette sales nose-dived as taxes rose
during the mid- 1980s and early 1990s” (Lee 2). Similarly, immediately after
the introduction of city and state taxes on cigarettes in New York, “local
newspapers reported a ‘flood’ of cigarette smuggling into NYC and a rise in
illegal street sales of untaxed cigarettes, particularly in low-income
neighborhoods. Popular brands, it was reported, could be bought on the streets
from bootleggers for as little as $5.00 per pack” at a time when legal retail
prices of cigarettes averaged $7.50-$8.00 per pack (Shelley, Cantrell et al.
1). The unwanted effects of smuggling are compounded since people are able to
purchase cigarettes at lower prices than the authorities would like them to
pay; tax revenues are lost to smuggled products, while more law enforcement
personnel is retained in order to combat smuggling; and honest businesses are
faced with unfair competition in the shape of those who choose to
circumnavigate the law.
Abolition of tobacco
consumption through the employment of excise taxation is failing to extinguish
the activity, exactly like the outright prohibition of alcohol failed to
produce the desired goal during the 1920s. One fallacy of the
anti-tobacco advocates’ view is evident in the opinion of Merriman—a proponent of
prohibition-by-taxation—who assumes that smuggled cigarettes cannot be obtained
in convenient locations (Merriman 2). Merriman’s approach is typical of the
orthodox economists’ method where purposeful human action is not acknowledged
as the driving economic force. Practice shows that the inconveniences of
increased prices and having to seek out sources of cheaper than legal
cigarettes do little to deter smokers from their habit. Perhaps no better proof
of the fallacy of Merriman’s assumption can be found than the Government of
Ontario’s billboard campaign “Don’t Be Fooled! Illegal smokes come in baggies…
and packs.” This recent campaign is an open admission of the failure of the
Government of Ontario’s policies regarding smoking, as well as a rebuke of the
assumption that illegal cigarettes cannot be purchased with little or no
inconvenience to consumers, or their awareness of the illegal nature of the
product they are buying. In a display of further ignorance of reality, Merriman
assumes that “[c]onsumers may even fear embarrassment or legal penalties if
they are detected buying smuggled cigarettes” (Merriman 2). He is proven wrong
by a number of sources, as for instance: 1) as the Government of Ontario’s
billboard campaign admits, some illegal cigarettes are undistinguishable from
legal cigarettes, and consumers need not know that they are purchasing smuggled
cigarettes; and 2) a study conducted by Shelley, Cantrell et al., discovers the
“$5 Man” freely walking the streets of Harlem, accepted as a folk hero:
Most smokers were aware of a recent expansion in the
illegal cigarette market in Harlem, which they observed corresponded with the
cigarette tax increase. The $5 man was the commonly used term for a highly
visible network of bootleggers who appeared after the tax increase throughout
the community on street corners, in busy shopping areas, outside subway
entrances, and in apartment buildings. Most smokers admitted buying cigarettes
from the $5 man rather than stores as a way of avoiding higher taxes (Shelley,
Cantrell, et al. 3).
Luccasen III, Coats et al.,
find that in the UK while “overall duty paid sales of hand rolling tobacco
(HRT) have fallen by almost 50%, overall consumption of HRT has more than
doubled” (Luccasen III, Coats et al. 2). Similarly, they find that middle and
high school students in Turkey are able to easily buy smuggled cigarettes
(Luccasen III, Coats et al. 2). In fact, Canada began a temporary about turn in
policy when it was discovered that the number of teen smokers was actually rising
due to smuggling activities (Lee 3); perhaps because smugglers do not check
ID’s. Again we see a result quite the opposite of the target set by government
planners. It can easily be observed that neither the increased prices, nor the
inconvenience of buying smuggled cigarettes play and effective role in turning
people away from consuming tobacco products in general, and cigarettes in
particular.
To be sure, it is the lowest
income communities that suffer the most from the increasing prices of cigarettes,
as well as from the crime of smuggling. Luccassen, Coates et al. find that “the
incentive to buy cheaper ‘illegal’ tobacco/cigarettes is greater for poorer
households as tobacco products consume a larger proportion of their disposable
incomes” (Luccassen, Coates et al. 2). At the same time it is those poorer
households that smoke more regularly. Shelley, Cantrell et al. find that the
inhabitants of low income Harlem, NY need cigarettes to help them cope with the
stresses of their everyday lives (Shelley, Cantrell et al. 7). The same study
concludes that the disparities in smoking prevalence by socioeconomic status
are widening, as “[a]dults living below the poverty line have higher smoking
rates (29.0% vs. 20.6%) and are less likely to quit successfully compared with
those living at or above the poverty line” (Shelley, Cantrell, et al. 1).
Thornton (71-72) lists a number of arguments that proponents make in favor of
prohibition. We shall discuss some of them in turn:
“1. Expenditures formerly made
on prohibited goods would be put to better use on items such as life insurance,
food, shelter, and savings.” This argument neglects the relative elasticity of
the demand of the good in question. As can be seen from the studies cited,
consumers will pay higher prices for cigarettes rather than spend the money
they would have otherwise spent on cigarettes on other goods or services.
From Shelley, Cantrell, et al.
(6) we learn that “[m]ost smokers said that regardless of price, they would
find a way to purchase cigarettes, legally or illegally, because they were
addicted and unable to quit. But they acknowledged that the rising price of
cigarettes was leading to potentially detrimental tradeoffs for those smokers
who were unable to quit: ‘They would exchange their food stamps to get that
[cigarettes].’ (Female smoker, 25-49 years)” With low income individuals the
extra money spent on cigarettes is that much more likely to be money that would
be otherwise spent on general welfare of the individual.
“3. Consumption of prohibited
products causes harm to the health of the consumer. Illness reduces time on the
job, increases the demands on health-care facilities, and increases the cost of
government-provided health care.” This argument neglects the fact that personal
pleasure is the most desired good and that individuals tend to value it more
highly than what seems rational to intellectuals, legislators and planners.
Furthermore, the availability of third-party healthcare seems only to be an
inducement to unhealthy behavior.
“4. Addiction, compulsive
behavior, and habits are problems beyond individual control and must therefore
be placed in the control of the state.” Governments across the world have been
fighting one form of addiction or another for the better part of the last one
hundred years with little or no success. Practice has proven this argument
wrong, as prohibition of a good tends to make it more potent and thus more
difficult to control by its user.
“5. Use of certain products
causes violence and criminality in individuals who otherwise would not indulge
in such behavior. Prohibitions help reduce crime, corruption, and social
vices.” Contrary to this argument, history shows that prohibitions give rise to
organized crime. There is no better example that the rise of the Mafia in the
US during Prohibition. The lure of crime is more likely to be found attractive
among the lower income members of society, thus increasing their chances to
become incarcerated. These individuals perhaps could find better income
employment if tobacco products were not pushed outside the realm of legality,
since this would mean a higher demand on the job market. It is not difficult to
see that the poor suffer doubly by the measures that are introduced with the
intent of improving the quality of their lives.
“7. Use of certain products is
infectious and would quickly spread to all socioeconomic groups, possibly
leading to the addiction of substantial segments of the population.” This
argument is another manifestation of the overgeneralization of orthodox economists.
People are seen as bulk masses unable to make personal decisions for
themselves.
“8. Use of these drugs is
unnecessary and has no beneficial social function.” Value is subjective, thus
what is a “beneficial social function” cannot be defined in any objective way.
As noted by Shelley, Cantrell, et al., low-income earners use cigarettes as a
means to cope with stress, thus finding social benefit in them.
“10. Given a properly
established policy with appropriate penalties and adequate resources, potential
users will be discouraged from experimenting, and current users will be
isolated or forced to abandon their habits. In the long run, then, prohibition
can virtually abolish the product from the market.” The “$5 Man” found in the
study conducted by Shelley, Cantrell, et al. rebukes this argument.
The high exposure and
visibility of the “$5 Man” makes him an easy target for arrest.
On the other hand,
anti-tobacco activists claim that the percentage of smokers is declining. This
claim is difficult to prove, as no reliable empirical data exists. At the same
time it is estimated that the absolute number of smokes in North America has
remained largely unchanged for the past 40 years. Shelley, Cantrell, et al. (1)
give a perfect example of how unreliable data on diminishing smoking habits is.
In one instance they cite that “data from the 2003 NYC Department of Health and
Mental Hygiene’s Community Health Survey (CHS), a telephone-based survey of
10,000 NYC residents indicated an unprecedented 11% decrease in smoking
prevalence that corresponded with the tax increases. Smoking rates fell from
21.6% in 2002 to 19.2% in 2003.” Despite the CHS’s claim of an 11% decrease in
smoking, the year-on-year rate between 2002 and 2003 remains within the
standard margin of error. Another example in the same study tell us that
“[a]lthough smoking in the United States has declined, in part because of
effective statewide tobacco control programs and policies, disparities in
smoking prevalence by socioeconomic status appear to be widening.”
Additionally, it is impossible to know whether the percentage of smokers is
declining as a result of government intervention or due to shifting attitudes
among consumers—or simply that it appears to be declining as a result of an
increase in the sales of untraceable illegal cigarettes.
However, a far stronger case
for anti-tobacco legislation is made on the grounds that it tobacco related
illnesses increase the costs of socialized healthcare. The nature of
third-party healthcare coverage is outside the scope of this paper, however, at
this point it should be noted that third-party provided medical care encourages
less personal responsibility on behalf of individuals. Likewise, the quality of
smuggled cigarettes is not put under the same scrutiny by consumers as that of
legal tobacco products. A major flaw in the Wholly Superfluous Approach is
particularly detrimental to healthcare, as “[t]he product, its quality, and
attributes will experience tremendous change moving from a competitive market
environment to one dominated by prohibition. These changes should of course be
attributed to intervention, not to the market. Cave and Reuter (1988) found
that entrepreneurs (smugglers) learn from experience; such increased knowledge
can result in lower prices even during periods of increased enforcement
efforts” (Thornton 82). Economies of scale encourage higher potency (Thornton
93), while lack of advertizing and transparency encourage diminishing qualities
of products.
[P]rohibition establishes a wholly superfluous discovery process with respect to the potency of illegal [products]. Black market entrepreneurs are spurred on by artificial, prohibition-created profit opportunities in a similar fashion to entrepreneurs in a legal market responding to profit opportunities. At one level, the entrepreneur supplies a profit-maximizing quantity of the product, in both legal and illegal markets. On another level, the profit motive prompts entrepreneurs to alter production techniques, product quality, and the product itself. Market forces lead to certain industry standards.… In prohibited markets, however, consumers face fewer choices at any time, but severe product variability over time (Thornton 89).
Another point to be made
against government intervention against tobacco products is related to the fact
that governments which have anti-smoking policies in place also have subsidy
programs in place to compensate tobacco farmers for loss of revenue. One such
program, administered by Agriculture Canada was the Tobacco Transition Program
which cost taxpayers $284 million. The intent of the program was to encourage
tobacco farmers to switch crops by way of having the Federal Government buy out
their crops. The program turned out to be a failure, as Mann reports that
[t]obacco quota holders who agreed to leave the industry were paid $1.05 per pound for quota. … But some farmers who took money to leave the industry then switched their land and equipment to relatives who continued growing tobacco under the new licensing system.
In conclusion, the detrimental
side effects of prohibition-by-taxation legislation are obvious, while the
effectiveness of these polices remain dubious at best. Anti-tobacco policies
come about due to misconceptions of the market’s ability to solve social
problems (although rent seeking is typically required for prohibitions to be
enacted). Bureaucracies established by prohibition are inherently inefficient
and unable to discover the knowledge required to solve social problems.
Prohibition also suppresses the market’s ability to solve social problems, so
that little or no progress is made while prohibitions are in effect. And
finally, prohibitions create profit opportunities which add to the problems
prohibition is intended to solve (Thornton 83).
As already noted, prohibition
is an example of government interventionism, which is in itself the antithesis
of a free market. The market allows consumers to decide how to spend their
incomes. Anti-tobacco advocates neglect the fact that not all individuals have
the same wants and goals in life. Tobacco products have been accepted to be
detrimental to human health since the 1960s, yet remain among the most popular
goods on any market. This must mean that consumers value the immediate pleasure
of a cigarette far more than their long term health.
Works
Cited
Hudgins, Edward L. “Memo To
The Mafia: Smuggle Cigarettes.” Regulation 21.2
(1998): 49-55.
Lee, Dwight R. “The
Government’s Crusade Against Tobacco: Can It Ultimately Succeed?”USA Today Magazine 126.2636
(1998): 16-19.
Luccasen III, R. Andrew;
Coats, R. Morris; Karaham, G. “Cigarette Smuggling Mitigates The Public Health
Benefits Of Cigarette Taxes.” Applied Economic Letters 12.12 (2005): 769-773
Mann, Susan. 24 Nov. 2011
<http://www.betterfarming.com/online-news/audit-takes-aim-tobacco-buyout-4672>
Merriman, David. “Cigarette
Smuggling Does Not Reduce The Public Health Benefits Of Cigarette Taxes.” Applied Economic Letters 9.8 (2002): 493-496
Shelley, Donna; Cantrell, M.
Jennifer; Moon-Howard, Joyce; Ramjohn, Destiny Q; VanDevanter, Nancy. “The $5
Man: The Underground Response To A Large Cigarette Tax Increase In New York
City.” American
Journal Of Public Health 97.8
(2007): 1483-1496.
Thornton, Mark. The Economics Of Prohibition. Salt Lake City: University of Utah
Press, (1991).
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