Les Echos has reported on the increased prices for tobacco which have come into effect this week in France. Under this plan the price of fine-cut tobacco has risen by €2, while the price of cigarettes has risen by €1. By raising the price of fine-cut this move is expected to significantly increase illegal tobacco sales and undermine the government’s tax base.
Driving consumers to the illegal market is a very risky move for a government aiming to protect its tax take. Once consumers fall outside the tax net it is difficult to recover them, and taxing beyond the optimal rate is counterproductive, as it ultimately results in lower government revenues. In the case of tobacco tax, a key element of protecting revenues is maintaining a price differential between cigarettes and fine-cut, in order to maintain a buffer from illegal trade. The evidence overwhelmingly points to the fact that aggressively raising the tax on fine-cut tobacco leads to more illegal trade and lower tax takes.
ESTA Secretary General Peter van der Mark said: “The French approach to tobacco tax reflects a complete lack of regard for evidence-based policymaking. From experience policymakers know that raising taxes on tobacco products without maintaining the buffer of fine-cut results in more money flowing into the hands of criminals in the black market, and less into the public coffers. Policymakers have a duty to serve in the best interests of their citizens. In France the political class has here abrogated that responsibility, choosing to pursue an ideology instead of the welfare of the people they were elected to serve.”