The linkage between tax burden and illicit trade of excisable products: The example of tobacco

Abstract

Illicit trade in tobacco is now a global phenomenon. Experience across both advanced and developing economies demonstrates that the key economic drivers influencing the illicit tobacco trade are excessive tax levels, usually resulting in a sharp decline in cigarette affordability, and organised crime's willingness to supply given the opportunity to gain large profits from tax avoidance. However, when cigarette affordability is taken into account, excise levels and revenues can be increased while consumption is reduced and the illicit trade is kept in check. The clear implication is that recommendations for a 'one size fits all' global excise tax incidence target of 70%, as proposed by the World Health Organization (WHO), would be very destabilising if implemented. Excise incidence is flawed as the basis for setting tax policy, as the WHO has acknowledged in its own country research. International experience, including that of the European Union (EU) accession countries, clearly shows that countries which have implemented the sort of substantial tax increases that the WHO's proposals would imply have seen a sharp rise in illicit trade in cigarettes, damaging the long-term tax base and undermining public health objectives.