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Archive for the ‘Tobacco’ Category

The United Nations is not nearly as bad as other international bureaucracies such as the Organization for Economic Cooperation and Development or the International Monetary Fund.

But that’s because the U.N. tends to be completely ineffective. So even when the bureaucrats push for bad policy, they don’t have much ability to move the ball in the wrong direction.

But just like a blind squirrel occasionally finds an acorn, the United Nations periodically does something that genuinely would expand the power and burden of government.

And that’s what happening this week in Moscow. Under the “leadership” of the U.N.’s World Health Organization, hundreds of bureaucrats have descended on the city for the “Conference of the Parties (COP6) to the WHO Framework Convention on Tobacco Control (WHO FCTC).”

But this isn’t the usual junket. The bureaucrats are pushing to create “guidelines” for tobacco taxation. Most notably, they want excise taxes to be at least 70 percent of the cost of a pack of cigarettes.

I’m not a smoker and never have been, but this is offensive for several reasons.

1. Enabling bigger government.

If there were five gas stations in your town and the owners all met behind closed doors to discuss pricing, would the result be higher prices or lower prices? Needless to say, the owners would want higher prices. After all, the consumer benefits when there is competition but the owners of the gas stations benefit if there’s a cartel. The same is true with government officials. They don’t like tax competition and would prefer that a tax cartel instead. And when tax rates get harmonized, they always go up and never go down. Which is what you might expect when you create an “OPEC for politicians.”   In their minds, if all governments agree that excise taxes must be 70 percent of the cost of cigarettes, they think they’ll got a lot more tax revenue that can be used to buy votes and expand government.

2. Promoting criminal activity.

In the previous paragraph, I deliberately wrote that politicians “think they’ll get” rather than “will get” a lot more tax revenue. That’s because, in the real world, there’s a Laffer Curve. We have lots of evidence that higher tobacco taxes don’t generate revenue and instead are a boon for smugglers, criminal gangs, and others that are willing to go underground and provide cigarettes in the black market. We saw this in Bulgaria and Romania.  We saw in in Quebec and Michigan. And we saw it in Ireland and Washington, DC. As I explained a couple of years ago, “In many countries, a substantial share of cigarettes are black market or counterfeit. They put it in a Marlboro packet, but it’s not a Marlboro cigarette. Obviously it’s a big thing for organized crime.” And if the WHO succeeds, the problem will get far worse.

3. Eroding national sovereignty.

 Or maybe this section should be called eroding democratic accountability and control. In any event, the issue is that international bureaucracies should not be in the position of seeking to impose one-size-fits-all policies on the world. Particularly when you get perverse results, such as bureaucrats from health ministries and departments supplanting the role of finance ministries and treasury departments. Or when the result is earmarked taxes, which even the IMF warns is problematical since, “Earmarking creates pots of money that can invite corruption and, unchecked, it can lead to a plethora of small nuisance taxes.” And keep in mind the WHO operates in a non-transparent and corrupt fashion.

For more information, Brian Garst of the Center for Freedom and Prosperity has a thorough analysis of the dangers of global taxation.

By the way, the health community will argue that globally coerced tobacco tax hikes are a good idea since the money can be used to fund programs that discourage tobacco use.

Yet we have some experience in this area. Many years ago, state politicians bullied tobacco companies into a giant cash settlement, accompanied by promises that much of the money would be used to fight tobacco use.

But, as NPR reports, politicians couldn’t resist squandering the money in other areas.

So far tobacco companies have paid more than $100 billion to state governments as part of the 25-year, $246 billion settlement. …all across the country hundreds of millions of dollars have gone to states, and the states have made choices not to spend the money on public health and tobacco prevention. …Myron Levin covered the tobacco industry for the Los Angeles Times for many years and is also the founder of the health and safety news site Fair Warning. He says talking states into spending settlement money on tobacco prevention is a tough sell.

Even when the politicians are asked to spend only a tiny fraction of the money on anti-smoking programs.

To help guide state governments, in 2007 the Centers for Disease Control and Prevention recommended that states reinvest 14 percent of the money from the settlement and tobacco taxes in anti-smoking programs. But most state governments have decided to prioritize other things.

Needless to say, governments around the world will behave like state governments in America. Any additional tax revenue will be used to expand the burden of government spending.

Let’s close with some big-picture analysis. Bureaucracies inevitably seem drawn to mission creep, which occurs when agencies and departments get involved in more and more areas in order to get more staffing and bigger budgets.

But when that happens, the core mission tends to get less attention. For many bureaucracies, that probably doesn’t matter since the core mission probably doesn’t have any value (HUD, anyone?).

But presumably there is a legitimate government role in preventing something like infectious diseases. So why isn’t WHO focused solely on things such as Ebola and SARS rather than engaging in ideological campaigns to expand the size and scope of government?

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What do cigarettes and capital gains have in common?

Well, they both start with the same letter, so maybe the Cookie Monster could incorporate them into his favorite song, but I’m thinking about something else. Specifically, both cigarettes and capital gains tell us something important about tax policy, the Laffer Curve, and the limits of political bullying.

In both cases, there are folks on the left who disapprove of these two “c” words and want to penalize them with high tax rates.

But it turns out that both cigarettes and capital gains are moving targets, so the politicians are grossly mistaken if they think that punitive taxation will generate a windfall of revenue.

I’ve already discussed why it’s senseless to impose high tax rates on capital gains. Simply stated, people can avoid the tax by not selling assets.

This might not be an ideal way of managing one’s investments, and it certainly isn’t good for the economy if it discourages new investment and prevents people from shifting existing investments into more productive uses, but it’s very effective as a strategy for individuals to protect against excessive taxation.

We see something quite similar with cigarettes. People can simply choose to buy fewer smokes.

Michel Kelly-Gagnon of Canada’s Montreal Economic Institute explains why higher tobacco taxes are not a guaranteed source of revenue for the political class.

Tax increases do not in each and every case lead to increases in government revenues. …When taxes on the consumption of a good are too high, you can get to a point where taxable consumption decreases and government revenues diminish rather than increase. Or at any rate, they don’t increase as much as what would be expected given the tax increase. This phenomenon constrains government’s ability to levy taxes. …There have been numerous examples in Canada of excessive taxes having a negative impact on government revenues. As shown by my colleagues Jean-François Minardi and Francis Pouliot in a study published last January ., there’s been three “Laffer moments” when it comes to tobacco tax revenues in Quebec since 1976. Whenever the level of taxation exceeded $15 per carton, the proceeds of the tobacco taxes eventually diminished. These are no isolated incidents. Laffer shows that the theory is confirmed by the experience of Cyprus, Denmark, Germany, Great Britain, Greece, Ireland, Latvia, Portugal, and Sweden.

Here’s a chart from his column showing how tax revenue has dropped in Quebec when the tax burden became too onerous.

Michel then acknowledges that some people will be happy about falling revenue because it presumably means fewer smokers.

But that’s not necessarily true.

While it is true that some people are deterred from smoking by tax increases, this is not the case of all smokers. Some avoid taxes by buying contraband cigarettes. Tax increases have no effect on the health of these smokers.

And because the tax burden is so severe, the underground economy for cigarettes is booming.

The folks at Michigan’s Mackinac Center have some remarkable and thorough estimates.

Since 2008, Mackinac Center for Public Policy analysts have periodically published estimates of cigarette smuggling in 47 of the 48 contiguous states. The numbers are quite shocking. In 2012, more than 27 percent of all Michigan in-state consumption was smuggled. In New York, almost 57 percent of all cigarettes consumed in the state were also illicit. This has profound effects on the revenue generated by state (and sometimes local) government. …We estimate nationwide revenue losses due to cigarette smuggling at $5.5 billion, a statistic consistent with the Bureau of Alcohol, Tobacco, Firearms and Explosives’ $5 billion estimate for 2009.

Here are the numbers for each state.

If all this evidence isn’t enough for you, I also encourage a look at the impact of higher tobacco taxes in Ireland, the United States, and Bulgaria and Romania.

Heck, even the city of Washington, DC, serves as a perverse role model on the foolishness of over-taxation.

P.S. Since this column focuses on the Laffer Curve and tobacco taxation, I would be remiss if I didn’t point out that Art Laffer recently put together a Handbook of Tobacco Taxation – Theory and Practice.

P.P.S. Art implies, at least indirectly, that policy makers should set the tax rate on tobacco at the revenue-maximizing level. That is far better than having the rate above the revenue-maximizing level, to be sure, but it rubs me the wrong way. I will repeat to my final day on earth that the growth-maximizing tax rate is far superior to the revenue-maximizing tax rate.

P.P.P.S. I’m currently in Australia for a series of speeches on fiscal policy. But as you can see from this photo, the PotL and I managed to find time to act like shameless tourists.

Tourists in Oz

P.P.P.P.S. Since I’m imitating Crocodile Dundee in the photo, I should close by noting that Paul Hogan (the actor who played Crocodile Dundee) has been harassed by the Australian tax police.

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We all know that alcohol prohibition was great news for organized crime in the 1920s, and we also know that drug prohibition is causing widespread societal destruction today, but taxation also can facilitate criminal behavior. Specifically, there is considerable evidence that punitive taxes on cigarettes promote criminal activity. Here’s a video from Michigan’s Mackinac Center.

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In the private sector, no business owner would be dumb enough to assume that higher prices automatically translate into proportionately higher revenues. If McDonald’s boosted hamburger prices by 30 percent, for instance, the experts at the company would fully expect that sales would decline. Depending on the magnitude of the drop, total revenue might still climb, but by far less than 30 percent. And it’s quite possible that the company would lose revenue. In the public sector, however, there is very little understanding of how the real world works. Here’s a Reuters story I saw on Tim Worstall’s blog, which reveals that Bulgaria and Romania both are losing revenue after increasing tobacco taxes.

Cash-strapped Bulgaria and Romania hoped taxing cigarettes would be an easy way to raise money but the hikes are driving smokers to a growing black market instead. Criminal gangs and impoverished Roma communities near borders with countries where prices are lower — Serbia, Macedonia, Moldova and Ukraine — have taken to smuggling which has wiped out gains from higher excise duties. Bulgaria increased taxes by nearly half this year and stepped up customs controls and police checks at shops and markets. Customs office data, however, shows tax revenues from cigarette sales so far in 2010 have fallen by nearly a third. …Overall losses from smuggling will probably outweigh tax gains as Bulgaria struggle to fight the growing black market, which has risen to over 30 percent of all cigarette sales and could cost 500 million levs in lost revenues this year, said Bezlov at the Center for the Study of Democracy. While the government expected higher income from taxes in 2010 it has already revised that to the same level as last year. “However, this (too) looks unlikely at present,” Bezlov added. Romania, desperately trying to keep a 20 billion-euro International Monetary Fund-led bailout deal on track, has a similar problem after nearly doubling cigarette prices in 2009 then hiking value added tax. Romania’s top three cigarette makers — units of British American Tobacco, Japan Tobacco International and Philip Morris — contributed roughly 2 billion euros to the budget in taxes in 2009, or just under 2 percent of GDP. They estimate about a third of cigarettes in Romania are smuggled and say this could cost the state over 1 billion euros.

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No, that’s not the name of a new TV series. We should be so lucky. Instead, it’s a good description of the government’s approach to tobacco. Instead of letting adults make up their own minds about costs and benefits of risky choices (which includes most things in life, such as crossing a street and eating a cheeseburger), nanny-state officials have decided to investigate menthol-flavored cigarettes. And since the Food and Drug Administration has been given authority over the tobacco industry and since the FDA’s supposed purpose is to ensure drugs are “safe and effective,” that almost certainly means this latest campaign will lead to either further restrictions on free speech or outright bans. Here’s a blurb from the Wall Street Journal:

Congress last year added the tobacco industry to the FDA’s regulatory mix and today a panel of health experts making up the agency’s new Tobacco Products Scientific Advisory Committee is kicking off a two-day meeting. First on the agenda: how menthol flavoring in cigarettes affects smokers’ habits. Small wonder that menthol is getting early attention, says the New York Times, which notes menthol butts account for almost a third of the $70 billion U.S. cigarette market. After more meetings, the advisory panel will send recommendations to the FDA, which could eventually decide to ban menthol products or take steps to curtail their marketing.

One can only wonder how far down the slope we will slide. There already are attacks against fatty foods and sugary soft drinks. Both provide pleasure to many people, but that no longer means much in Washington. Will regulators, either at the FDA or elsewhere, eventually decide that anything linked to obesity must be regulated and/or taxed? And now that government is going to pick up the tab for an even larger share of health costs, how long before the politicians use obesity-related costs as a major justification for further efforts to control our private lives? Maybe some day we will have a Federal Health Police to enforce daily exercise mandates? I better stop now before I give them any ideas.

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