Many of us will be familiar with the idea of the Laffer Curve -- the idea that a tax rate can be too high to maximize revenue from that tax.
If we really, really, tax people for doing this thing, then fewer people will do it -- that's obvious. And it's logically possible that so many fewer will do it that while we're getting more tax from each person who still does, we get less tax overall. For so many fewer people do it that the total tax take is that, sadly, lower.
Note that when we use this properly, it's wholly sane and sensible. Sometimes it is true that a lower tax “rate” will produce more tax. It becomes odd when the insistence is that lowering the tax rate always produces more tax -- this is not just odd it is untrue.
It is possible to then claim -- I do, often enough -- that most taxes are that high because politicians just love spending money. But that's an opinion, not a proven claim.
But we do need to go deeper on this.
Each and every tax has its own peak of that curve. The maximum revenue raising rate of a VAT, an income tax, a capital gains tax, a house buying tax, and so on is different. But also one stage deeper still.
Sometimes we actually want to stop people doing that thing. So falling tax revenue isn't a problem in that we've raised taxes so that fewer people are doing that thing, and that's just great. This is the usual background to the punitive taxation of cigarettes and tobacco. We want to force people to smoke less.
So, this isn't a problem: “In particular, large increases in cigarette prices and duties in June 2024 and January 2025 have led to a decline in sales, which has an impact on revenue.”
We want people to smoke less. They are doing so. At which point we can declare victory and go home.
But we have to go that one stage further yet again.
What is it that people are doing rather than smoking those legally taxed cigarettes? If people are just not smoking, then again, victory, we've won.
Well, maybe, for there are always people like me around who insist that if people wish to smoke themselves to death, then that's their life, their death, up to them. But I agree I'm a long way out there on the far wing of liberty beats public health argument.
So let us restrict ourselves to the argument that people should smoke less and that tax is the way to make them do so.
So if we tax cigarettes a lot -- a lot lot -- what actually happens?
Do people stop smoking altogether, or just switch over to bidis, cigars, or pipes? OK, so we tax those three as well. What happens then?
And what we're finding around the world is that legal, and taxed, cigarettes seem to get replaced by illegal and untaxed cigarettes. At least, at some level of taxation they do.
In Australia, there are so many fire bombings of possibly illegal tobacco stores that it appears to resemble the United States during alcohol prohibition.
In my native England, there's a method of checking on what people are actually smoking rather than what the tax records say they are. Which is to go out and pick up empty cigarette packets from the streets and public rubbish bins.
Sure, of course, you'll not collect everything that way. But there's no reason to think that people are more likely to finish an illegal packet in public than a legal one. So the ratio of tax paid and legal to illegal and tax unpaid can be estimated by this method.
From such research (a friend of mine, Chris Snowdon, is a leading expert in this field) we find out that the most common brand smoked is something called “Manchester” which is not, in fact, a legal and taxed brand anywhere in the world.
That is, one reason why there's that peak to the Laffer Curve is that when the legal tax rate is “too high” then people go and do illegal stuff.
It isn't true that falling tax revenues from cigarettes means people are smoking less. Or it isn't necessarily true that this is the case. It could just be that the smugglers and criminals are gaining more of the market.
So, yes, falling tax revenue from tobacco might be a good thing as people are smoking less. It could also be a bad thing.
If illegal cigarettes are much cheaper than legal ones, then a falling tax revenue might mean that more smoking is happening as people smoke more of the cheaper and illegal cigarettes.
This is something we cannot work out from theory; it's something we have to go out and count. It's an empirical answer, not a theoretical one.
Which leads to the real lesson here. Which is that the true answer to most economic questions is “it depends.”
High cigarette taxes, lower cigarette sales, a good or bad thing? Well, are people smoking less or just switching to untaxed, illegal, and possibly smoking more?
Well, it depends.
Tim Worstall is a senior fellow at the Adam Smith Institute in London.