Smoking in the Internal Market


This blog has gone through a rather lengthy hiatus, for which we apologise to the dedicated handful that check back regularly. Unfortunately our contributors’ busy schedules have not allowed regular blogging. That being said, a slightly contradictory statement from the EU’s Tax Commissioner inspired a quick break from my work.

The Commission has proposed an increase in excise duty on cigarettes in order to reflect inflation and combat consumption (more on the story at the EUObserver), as commendable an initiative as any. The Commissioner stated that "Substantial differences in tax and price levels of tobacco products lead to considerable cross-border shopping and intra-community smuggling...These differences undermined the budgetary and health objectives of the Member States and resulted in a distortion of the functioning of the Internal Market".

The contradiction, small as it is, lies in the Commissioner’s reference to the ‘functioning of the internal market’. Certainly tax competition does distort a level playing field; the spectacle of German, French and Belgian smokers pouring into Luxembourg to stock up is notorious. However, it seems that the goal of equivalent taxation is not the establishment of an internal market in which competition is not distorted, but the attainment of equivalence that will discourage cross-border shopping for tobacco products. With the proposed duty of at least 63%, it seems that there would be little room for significant cross-border retail competition, thus making the internal market largely irrelevant. As such, the Commission’s proposal seems to have little to do with efficient competition and everything to do with fiscal and health policies.

Comments

Keith Grech said…
Tend to agree with you, with one slight exception. This has nothing to do with health issues and everything to do with taxation and fiscal objectives.

Tobacco and the consumption thereof has, what in economic terms is described to be, an inelastic demand. In other words, price levels in general do not affect the levels of consumption for the product in question.

The simple fact is that tobacco is an addictive product, and governments know very well that smokers in most cases will not, indeed cannot, be deterred by a shift in the price of tobacco.

The bottom line thus remains, that the EU and many of our national governments are dishonest with us, the people, when they try to hide behind health reasons for the promotion of fiscal policies when it comes to the issue of tobacco consumption.

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