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TAXES--THE POINT OF DIMINISHING RETURNS Why is it that whenever government tries to engineer people’s behavior through taxes the result is usually dismal failure? According to Milton Friedman, "Unless commands are supplemented with people’s willing cooperation, the commands are often undermined or ignored." We're seeing that axiom in action right now in the War on Smokers.
In 1988, California increased its cigarette tax from 10 to 35 cents a pack. Legal cigarette sales fell 28 percent. However, with the proximity of low-taxed cigarettes in Mexico, Indian reservations, and military bases, contraband cigarettes began flooding the state. Contraband sales account for up to nearly a quarter of cigarettes sold in California. Prof. Lee concludes that in view of these contraband sales, “smoking in California has not declined since the tax increase by any more than the nationwide average over the same period.” Perhaps the most interesting unintended effect of high cigarette taxes is the impact it has on youth smoking. In Canada, cigarette taxes resulted in massive cigarette smuggling (contraband cigarettes made up 30 to 50 percent of the Canadian market, according to Prof. Lee). Recently, Canada drastically cut its cigarette tax rate, not only to reduce smuggling, but also to prevent increased smoking among young people. How could high cigarette taxes cause increased youth smoking? As Prof. Lee writes, “Contrary to the usual argument, many Canadian officials concluded that high taxes made it difficult to control teenagers’ access to cigarettes.” In other words, the huge black market in cigarettes created by the high cigarette tax actually made it easier for young people to obtain cigarettes. Canadian Health Minister Diane Marleau explained the cigarette tax cut saying, “It will end the smuggling trade and enforce children to rely on regular stores for their cigarettes, where they will be forbidden from buying them until they are 19.” In less than five years, the internet should account for 20% of all U.S. cigarette sales, a $40 billion market, says a former tobacco company executive and CEO of an internet cigarette company. The number of internet cigarette outlets doubles every six months. The government is collecting fewer taxes even though the number of smokers is again on the rise. In the United States, the number of hijacked million-dollar shipments of cigarettes has more than tripled in the past year, and the smugglers aren't being caught. Those cigarettes have provided the "grubstake" for a black market operation that already rivals the Mafia in Prohibition-era America. For the do-it-yourselfer, the number of tabletop cigarette-making machines sold through tobacconists' has skyrocketed, in one case going from 20 machines a year to 50 machines a week.
The question then becomes, will the government recognize that the maximum price has been exceeded, or will the black market continue to thrive and grow? Either way, the same number of smokers will smoke; one way they'll be adding to the government coffers, the other way they'll be skirting the law. People will find a way to exercise their freedom, whether the government likes it or not. General Information | Frequently Asked Questions | Shipping | Order Status | Help |
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A recent study by economics professor
Dwight Lee, Center for the Study of American Business, Washington University
in St. Louis, shows that when Michigan raised the tax on cigarettes from 25
to 75 cents a pack, legal sales fell 30%, although the actual percentage of
smokers increased. Cigarette sales in surrounding low-tax states skyrocketed
as did rampant smuggling. 
The number of smokers in the country has
remained relatively steady for the past decade at around 60 million,
although the percentage drops as the population grows. With the increase in
college age smokers (38.6%), that probably won't change much in the next
decade.