The Turkish delight in cigarettes and taxes

January 14th, 2011

Broadly speaking, there are two reasons to tax.  There are taxes intended to raise revenue.  And there are taxes intended to dissuade a certain behavior, also called “sin taxes.”  The classic example of a tax to dissuade behavior is the cigarette tax.  It’s broad worldwide and considered quite effective, particularly among cigarette companies.  In fact, a researcher from MIT calculated that the 1982-83 rounds of price increases in the U.S. resulted in two million fewer adult smokers and 600,000 fewer teenage smokers.

But often the line between these two types of taxes is blurred because sin taxes can and do generate significant revenues.  Proceeds of cigarette taxes, for example, go to a wide range of programs.  On the federal level in the U.S., the Obama administration levied an expanded tax on tobacco users in 2009 in order to finance an expansion of health care for children.  All of the U.S. states also have their own additional cigarette tax, which range from $0.17 per pack in Missouri to $4.35 per pack in New York.  In the face of the current recession and massive budget shortfalls, many of those states have been raising cigarette taxes to help balance the books.

While these sin taxes can play an important role in mitigating negative externalities (which are costs imposed on members of society that are not consuming the good), they can be perilous for two reasons.  First, legislators often get carried away with the appeal of these taxes as they are generally welcomed by society and they can raise revenue for government.  Second, these taxes can have the unintended effect of expanding the black market as almost any increase in tax, even a small one, will inevitably push some sellers and buyers underground where prices are lower and profits are higher.

In recent years (and days), Turkey has hit both of these pitfalls with an overwhelming force.

Turkey has one of the highest per capita consumption rates of cigarettes in the world.  And it’s a figure that’s been on the rise.  In fact, between 1971 and 2000 per capita consumption of cigarettes rose 34% in Turkey.  In the U.S. that rate has dropped by about 45% for the same years.  And in recent years, consumption has increased at an even faster pace.  A full one-third of the entire Turkish population currently smokes tobacco.

Turkey also has one of the tax rates as a percent of retail prices on cigarettes in the world.  In Turkey this proportion is a staggering 78%, but it’s around 70% in most of Western Europe, 39% in Lithuania, and 61% in Hungary.  Turkey also has the second highest rate of tax levied on tobacco products among countries with a high tobacco consumption rate.  As a result, the Turkish government has become quite dependent on these proceeds, which now account for over 10% of the nation’s total government revenue.

Despite Turkish officials protests to the contrary, these high rates of tax can and do push legitimate sales into a black market.  While it is true that countries with the highest levels of smuggling are not those with the highest tax rates, widening the spread in price between the illegal products and the legitimate ones does provide an incentive for criminals and buyers alike.

There are few who might understand this dynamic better than Lütfi Ekinci, the manager of the Istanbul Customs House, who is in charge of all of Turkey’s customs houses, the entities tasked with searching for smuggled goods amongst legitimate ones.  In recent years, Turkish customs officials have seen a significant spike in commodity smuggling, including red meat and tobacco.  But Ekinci, along with 32 other customs managers, have a more intimate perspective.  These 33 men were recently taken into custody for operating a smuggling and bribery ring, which specialized in bringing large amounts of cigarettes into the country.  According to an intelligence memo, Ekinci led a special team of 20 who operated the ring and others “intervened at the borders by allowing smuggled goods to enter the country.”  After the arrests, police put forward that in Turkey, cigarette smuggling is more lucrative than the heroin trade.

I would not suggest that the tax burden on cigarettes in Turkey has led to this activity.  Even if that were true, legislators should not be held hostage by criminal members of society.  But this anecdote is an example of the dynamic nature of taxation.  The practice of legislation is not as cut and dry as legislators would prefer, as often there are unintended consequences that are not given due consideration ahead of time.

But ultimately the blame still lies with those who break the law.  Particularly when they are the same people who were tasked with carrying it out.

Written by Ann Hollingshead

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