This week's laudable initiative was badly thought through – and typical of a recent trend, writes NOEL WHELAN.
THIS WEEK’S call for a dramatic increase in tax on cigarettes is well-intentioned but badly thought through.
There is considerable merit in trying to use taxation and price mechanisms to achieve public policy objectives, and there are few public policy objectives more worthy than reducing smoking.
In my view smokers engage in
a dangerous and disgusting habit and their addiction imposes an unfair burden on all our health services.
However, I don’t believe that increasing tax on cigarettes is some kind of golden goose which could lay a solution, or even part of a solution, to the current crisis in the public finances.
The Irish Heart Foundation, the Irish Cancer Society and the anti-smoking charity Ash are to be complimented for their ingenuity in commissioning the high profile economist Jim Power to write a report to shore up the economic argument for this worthy health public health initiative. As a publicity device it worked.
There is room for some increase in the excise on cigarettes in the forthcoming emergency budget, but calls for a €2 tax on a packet of cigarettes at this time are wholly impractical and the claims made this week for the revenue potential of such a tax increase are frankly off the wall.
The report, while suggesting that the €2 increase on a packet of 20 would generate an astonishing €420 million in tax revenue, also argues that it would at the same time dramatically reduce cigarette consumption. There are many reasons why both would not happen in reality and certainly could not happen simultaneously.
The proposal fails to have regard for the realities of the modern Irish cigarette market.
At a time when the long-standing differential between the euro and sterling has shrunk and the practice of large-scale cross-Border shopping is now embedded in consumer patterns, especially in the Border area, opening a further €2 wedge in the price of cigarettes north and south of the Border makes no sense.
In response to that criticism, Power argued that the Government should “liaise”
with the UK government to co-ordinate tax rates on both sides of the Border. This is fine
in theory but even after decades of intense co-operation on peace-building the two governments have never been able to agree to co-ordinate tax rates and it is not going to just happen in the next four weeks.
Even if the differential between cigarette prices in both parts of this island could be eliminated, the proposal fails to have regard to the reality of the wider single European market in which we live.
In a world of cheap air travel, committed smokers can purchase substantial supplies of cheap cigarettes in other EU states provided they can justify the quantities, if challenged, as being for personal use.
More significantly, however, the report fails to appreciate the reality of a substantial and profitable illegal market in the importation of duty free cigarettes. A €2 increase in tax on 20 cigarettes would make that black market even more lucrative.
On Thursday, Power said that the inability to control the black market in smuggled cigarettes was not a good enough reason for not implementing a major public health initiative that will greatly reduce the prevalence of smoking.
However, it would not be a major public health initiative if it was undermined by legal, quasi-legal or illegal importation of cheaper cigarettes.
Of course, it is up to the authorities to better police the illegal trade in cigarettes, but what the economist fails to appreciate is that there is both an opportunity cost and diminishing return to any additional policing effort applied to tackling this black market.
There is no guarantee that spending more time, energy and money tackling illegal cigarette smuggling would bring about a significant reduction in this illegal trade, and such time, energy and resources could be better spent tackling other illegalities.
Those proposing the €2 tax increase on 20 cigarettes are also too dismissive of its inflationary impact. While accepting that the proposal would on its own add almost 1 per cent to inflation, they claim that because prices generally are currently falling that is not an issue.
However, all the international research suggests that an increase in tax on cigarettes imposes a particular burden on the lower paid and on welfare recipients.
Introducing a tax increase which is particularly harsh on welfare recipients at a time when their weekly welfare payments are likely to be frozen, if not decreased, would be particularly regressive.
The debate around this proposal reiterates a lesson we have learnt many times in recent months as economic commentary becomes more entwined with our politics.
What works in economic theory doesn’t always work in practice.
Economists have the luxury of criticising the actions of all politicians and the freedom to float a range of alternative purported solutions, but those actually exercising power have to operate within political realities and in the real economy. It’s a point worth remembering in the next four weeks.