Tobacco Smuggling and the EU -- or
"OH, WHEN WILL THEY EVER LEARN"
A major, often repeated, criticism of European officials is that they are insufficiently accountable and hence are not appropriately 'punished' for their errors and follies, as happens in both the private sector, and within the several national governments of the Union. However, when the mistakes are a product of the officials' own conduct, they deserve sure and swift punishment, demotion, or removal from office. Yet often they are applauded for their mistakes.
The latest example is media support for last Thursday's EU announcement that it is suing tobacco companies for their alleged complicity in lost tax revenue as a result of smuggling of cigarettes into the Union. Unless the goal of the Union is to subsidize lawyers, perhaps on the grounds they are unduly poor, or especially worthy, it would be well if the Ministers, Commissioners, bureaucrats, and officials first do three things: read a forthcoming work to be published by the UK think tank, the Social Market Foundation, called the Europe's Underground Economy (£10), and particularly the chapter on smuggling; read the American decision in the case brought by the Canadian government regarding smuggling of tobacco into Canada; and, lastly, contemplate their own acts, which induced the smuggling.
As the Europe's Underground Economy clearly points out, two basic sorts of goods are smuggled into a nation: 'contraband' -- goods which the government has, for policy reasons, banned. Such items typically include hard drugs, endangered species, and the like. To this must be added items which, for local reasons, nations have determined their citizens should not be permitted to purchase. The great American "experiment" with whisky and Prohibition, of course, is a prime example of such 'local' prescriptions. Such goods are prohibited from entering a nation state under any conditions.
A second category of smuggled goods are those which are smuggled in response to large price differences between the country into which the goods are smuggled, and the country of origin. These price differences are usually caused by tariff protection or significantly higher taxes in the country goods are smuggled.
Most importers will pay the tariffs and taxes because the cost of compliance with the law is less than the expected cost of avoidance. Avoidance costs may include such things as concealment of the goods for example in animal carcasses or tissue boxes, and, of course, bribery of corrupt customs and tax officials in the country into which the goods are being smuggled.
However, as long as the total cost of smuggling, including bribery, detection avoidance, and other costs, are less than the expected profits to be had from smuggling, it will occur. Indeed, smuggling has a long , and often glamourised, history. But the reasons for smuggling, whether through the Cinque Ports of Britain in the 17th and 18th centuries, or the EU of the 21st century, are reasonably constant: the nation into which the goods are smuggled levied taxes on imports which were so high as to make smuggling profitable.
Luc Venon, spokesman for the European Commission noted that taxes on each truckload of cigarettes are approximately one million dollars, and the EU has estimated that several thousand truckloads have entered member countries without paying taxes. So, as Mr. Venon has so quaintly put it : "We want money -- billions."
This wish
ignores reality. If taxes in EU countries were not so high, in the first instance,
smugglers would not find their business so profitable. It does not require a highly
trained economist to know that if a government creates, through its tax policies,
incentives to avoid taxation, people will do so. This is why, after all, investors (and
tobacco companies) generally engage in 'tax arbitrage' and structure their investments so
as to be taxed in lower tax regimes. Is it really wrong for a tobacco company to sell more
product in a low tax country knowing that some of it will be smuggled into a high tax
country? Most readers would, I suspect, agree that it would be wrong if and only if the
companies knew they were selling to smugglers.
The way to curb smuggling is simple: lower taxes and
remove the incentive to smuggle. But the EU is unlikely to do this since it fears that it
will lose the tens of billions of dollars in tobacco taxes (about 4% of total revenue) it
already collects. But this revenue stream is in danger anyway because, once entrenched
smuggling rings become established, they will become more efficient and be able to lower
their costs and cut further into the legitimate market. Perhaps officials could remove the
one billion dollar annual subsidy to tobacco farming as a way to reduce their dependency
on tobacco taxes.
It has been suggested that tax harmonisation policies within the EU member states would also eradicate smuggling. However, the cost of tax harmonization may be greater since it would reduce one of the only forms of governmental competition amongst the EU states and, of course, would merely induce more smuggling from non-EU states into the EU, through the Union's more porous borders. This would lead to a 'Fortress Europe' which would have to defend its borders from the more hardened, vicious, and violent international gangs engaged in smuggling. Moreover, tax harmonisation would also lead to counterfeiting of, not infrequently, highly inferior products. In the case of cigarettes, this is likely to mean higher tar and higher nicotine substitutes -- hardly something which the EU alleges it wants to promote. For example, according to survey evidence reported in Underground Economy, about a fifth of cigarettes found at British soccer matches were counterfeit.
Before launching its proposed civil action against tobacco companies, it would also be well if the Union's bureaucrats, Commissioners, and Ministers, read the decision in the case for 'lost taxes' filed by the Canadian government in a U.S. Federal district court. That court, harking back to centuries old law, ruled against the Canadian government, stating that one sovereign government could not compel another sovereign government to collect taxes for it. This, of course, was what the Canadian government was asking the American judiciary to do. If this had been upheld , it would have led to absurd results. For example, if some small governmental unit in America imposed some tax on internet sales originating in that area, and sold to a buyer in Belgium, the Belgian Government then could be required to collect the taxes for the American Government. That such a result is absurd does not require a degree in law. Yet the Canadian government spent more than 5 million Canadian dollars [4 million US] of the taxpayers' money to discover the obvious.
Before wasting
money of the taxpayers of the EU, as noted initially, Community officials should do some
basic reading, and, perhaps more importantly, recognize they, and their tax policies, are
the ultimate cause of the smuggling.
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Hugh High is a lawyer and economist. His book Does Advertising Increase
Smoking? Is published by the Institute of Economic Affairs. Mr. High is a contributing member of FORCES