Puff, a magic answer to Irish trade crime: cigarettes at €4
OPINION:REPORT AFTER report highlights the cost of trade crime to the Irish economy but we always appear to draw the wrong conclusion as to what should be done about it.
The latest report by EPS Consulting for the retail industry estimates the cost to the exchequer of crimes such as black market trading and shoplifting at €861 million (Irish Times, August 20th).
Of this, most of the lost revenue is accounted for by tobacco smuggling, at €526 million. It is suggested that more resources should be devoted to policing in this area and indeed that Garda resources should be redeployed from areas such as road traffic policing into enforcement of trade laws.
This is not the answer at all.
The illegal trade in tobacco, now apparently more profitable than drug trafficking, is a creation of government itself.
This illicit business has been created by a flawed policy of successive governments in constantly increasing taxes on cigarettes to the point where the price of cigarettes in Ireland is double the European average.
With the price of a 20-pack in Ireland at about €9, compared to about €5 in Denmark and Germany and about €4 in Spain, there is an extraordinary incentive to smuggle cigarettes into this country.
Excise duty and VAT account for nearly 80 per cent of the price, so the Government is primarily responsible for the high price of cigarettes.
This policy of increasing the excise duty on cigarettes has been urged on government by various organisations in the mistaken assumption that price increases will invariably lead to a fall in demand and the consumption of tobacco. Successive governments have been willing to oblige in the mistaken assumption that increasing excise duty will increase revenue to the government. Both assumptions are wrong.
Economic studies demonstrate that the demand for cigarettes is price-inelastic. This means that for a given increase in price, the effect on demand is significantly less. In other words, price increases have only a marginal effect on consumption. The reality is that in Ireland the level of smoking has not greatly declined, notwithstanding the constant and persistent increases in the price of cigarettes.
Government has consistently increased excise duty on cigarettes, to such an extent that it now accounts for more than 61 per cent of the price, with VAT accounting for a further 17.5 per cent. However, increasing excise duties and thus the price of cigarettes to unrealistic levels is not sustainable.
Ireland is part of the EU internal market which allows for the free movement of goods where cigarettes can be bought from other member states at half the price.
In addition, because of the extraordinarily high price of cigarettes in Ireland, criminal gangs and dissident republican organisation have engaged with a vengeance in the smuggling of cigarettes, often of a particularly toxic quality, causing a loss of revenue to the State of the order of €500 million a year.
We now have the ludicrous situation where contraband cigarettes account for about one-quarter of all tobacco smoked in Ireland.
Since the problem is of our own making, the solution lies not in wasting much needed manpower and resources of the Garda Síochána and Customs but in addressing the cause of the problem.
We need to reduce the price of cigarettes in this country to the European average of around €4.25 a packet. In this way we destroy the incentive for individuals to buy cigarettes abroad and for an illegal trade in smuggled cigarettes that is needlessly enriching criminal gangs and resourcing dissident republican organisations.
Such a reduction in price would not have a significant effect on the level of smoking. In destroying the trade in smuggled cigarettes, the State recovers the revenue it has been losing on the sale of tobacco in retail outlets throughout the country.
Measures to discourage smoking, such as better information for consumers on the health risks, warning labels on packs, prohibiting advertising, and imposing restrictions on smoking in the workplace, have been found to be more effective than price increases.
To confront criminal and dissident republican organisations, the State has an obligation to destroy the businesses upon which these organisations increasingly rely, that of cigarette smuggling.
Were the Government to adopt a policy of reducing prices to destroy the illegal trade of cigarette smuggling, it would restore lost Government revenue, reduce the pressure on the scarce resources of Garda and Customs and restore the rule of law in the area of cigarette sales in this country. I don’t smoke.
Eugene Regan is a senior counsel and former Fine Gael senator