Sin Taxes: Hamilton was Right

In Federalist 21, Alexander Hamilton explained:

It is a signal advantage of taxes on articles of consumption, that they contain in their own nature a security against excess. They prescribe their own limit; which cannot be exceeded without defeating the end proposed, that is, an extension of the revenue. When applied to this object, the saying is as just as it is witty, that, "in political arithmetic, two and two do not always make four." If duties are too high, they lessen the consumption; the collection is eluded; and the product to the treasury is not so great as when they are confined within proper and moderate bounds.

Roger Bate at AEI:

Today my colleagues Aparna Mathur, Cody Kallen, and I published a working paper on illicit tobacco. We hope it is the first paper in a series on changes in the tobacco market.

As authorities around the world have increased taxes on tobacco products in order to reduce smoking, illicit (untaxed) tobacco use has increased. Organized criminals have moved from smuggling brands into making their own products, known as illicit whites.

They make them legally in jurisdictions like Dubai or Paraguay and then smuggle them into markets where they have paid no tax, and may not contain any of the important warning labels. Some of the criminal groups behind illicit tobacco are implicated in terror financing as well.

We conducted a variety of empirical studies on availability of illicit whites, the legality of discarded packs, and smoker attitudes toward illicit products. We found that tax rates drive the illicit market, that smokers are annoyed by high taxes, and a minority are happy to buy illicit products.

Yet policymakers ignore these realities. New York is raising cigarette taxes to curb smoking, ignoring the rise of illicit tobacco.

What is unknown is whether smoking rates among those happy to buy illicit products are increasing since prices are far lower, whether the authorities, including the World Health Organization, can do anything about the rise in illicit products, and whether excess tax rates will undermine the conversion from smoking to far less harmful vaping.