Where to Find a Tobacco Smuggler?

Urged to forbid smoking, Napoleon III said, “This vice brings in one hundred million francs in taxes every year. I will certainly forbid it at once–as soon as you can name a virtue that brings in as much revenue.”

Still today, Napoleon was right, but not entirely.

Tobacco Taxes

France, Greece, and Spain top a Western European list of tobacco users:

Consequently, it makes sense that the EU, and especially France (at €8.09/$9.51 per 20-cigarette pack), tax tobacco products. Meanwhile, Bulgaria’s €2.03 ($2.38) tax for a 20-cigarette pack is the EU’s lowest:

Cigarette Taxes

EU countries do not have a choice. Subject to a minimum, the required tax is €1.80 ($2.11) per 20-cigarette pack in addition to a percent of the average retail price (unless the price per pack is more than €2.30). Then, adding in the EU VAT, smokers typically pay more for the tax than for the cigarette.

Smuggling

The downside, however, is smuggling. In the EU, smuggled cigarettes from low-price Germany wind up in France. Similarly, because of smuggling, high cigarette tax states like New York lost out on an estimated $21.95 billion in revenue between 2007 and 2023. We could say, though, that New York’s loss was New Hampshire’s gain. The cigarettes from New Hampshire that were sold elsewhere generated more than $1 billion in extra revenue for them:

Our Bottom Line: Elasticity

Napoleon III was not entirely correct because a state’s revenue depends on its tax rate. At too high a rate, revenue plunges. Explained with precise numbers by the Tax Foundation, it is all about the price elasticity of demand (PED). While the law of demand says we buy less when price rises, the question is how much less. Called elastic PED, when the decline is steep, then revenue also falls. Consequently, policy makers need to know when our quantity demanded moves from inelastic (prices have little effect) to elastic.

In Ireland, they miscalculated:

So, where are we?

Returning to our title, to find a tobacco smuggler, we might go to a state with high tobacco taxes.

My sources and more: Thanks to my IMF email for inspiring today’s post. From there, my next destinations were the Tax Foundation and Our World in Data. Then, if you want some confusion, do go to this EU tobacco tax website. And finally, do take a look at the economist that explained it all.