The author looks into the problem of smuggling and its relation with high excise duties applied in the EU.
Several days ago a news release was issued informing about approaching new increases in prices of tobacco products and fuel as Lithuania’s commitment to the European Union. In other words, the level of excise duties in Lithuania is to reach the minimal level set up by the EU. It’s evident enough that this minimal level is not minimal at all for Lithuania and other newcomers of the EU where the level of income and the living standard are expected to rise to the EU average only in some 15 to 30 years. Supposedly, the news was broadcast to let people get prepared to buy more expensive cigarettes and petrol, to look for their cheaper substitutes and, finally, to get used to the idea that news about the leaking Lithuanian border is a natural, inevitable and heightening malady.
Meanwhile, smuggling is growing with gusto! Every single rise in excise duties messages to smugglers-entrepreneurs about the swelling ranks of their potential customers and that they have an opportunity to mark up prices of their goods. It is impossible to measure the real scale of smuggling. The least recorded crimes are those which leave behind no victim and which do not harm a specific person. Such is the nature of smuggling: except a group of border-guards and a number of payers of excise duties and producers of legal goods, all the rest are satisfied – consumers, smugglers and a certain number of border-guards or customs officials.
One of the indicators, which is the source to start calculating the scale of smuggling, is the quantity of detained illegally carried cigarettes. According to the data of the State Border Guard Service, this quantity has been multiplying by double every year since 2001: the number of packages of cigarettes captured at the border amounted to 0,25 million in 2001, 0,5 million in 2002, 1,5 million in 2003 and 3,4 million in 2004. There is no doubt that having such experience in apprehending smuggled products and financial support from the EU the efficiency of the work of officials safeguarding the border and the customs has improved. However, it’s logical that if smuggling did not proliferate, the number of smuggled cigarettes detained should go down along with the officials’ advancing efficiency. This is because aggravated penetrability of the border increases the price of the end-use product.
A survey carried out by the Lithuanian Free Market Institute (LFMI) in 2004 showed that more than a half of cigarette consumers buy smuggled cigarettes at least once in a while. About a third of all cigarette consumers buy illicit cigarette supplies regularly or frequently. This data and the growing number of detained cigarettes demonstrate that the potentially improved border protection and a rising number of captured illicit goods fail to curb this illegal activity, currently developing more rapidly than before.
Problems arise not just in Lithuania. For example, in Sweden 1,35 million cigarette packages were confiscated in 2002, while the number in 2003 was 3,7 million. In Great Britain, empty cigarette packages collected after a football match showed that more than 90 percent of cigarettes smoked at the stadium that day had been smuggled. Great Britain estimates that as a result of illicit trade of tobacco products its budget does not collect income of about 6 billion euro from excise taxes and VAT.
Revenues from increased excise duties go into the government’s pocket, while multiplied profits from sales of illegal goods serve as investments into the smuggling business. Observing such favourable business conditions, the bosses of smuggling don’t lack ideas. Starting at the lowest level, the working and living conditions are facilitated for the so-called “ichtyomen,”* drivers of enhanced-enlarged cross-country vehicles, old ladies-sellers and other lowest-income employees. Ending at the highest level, prevention of punishment is tackled by trimming the list of punishable actions of smuggling, by softening sanctions laid down in the Penal Code or by dealing with prevention of penalties for smugglers directly in courts.
It’s natural that once a smuggling business is established, and all its chains are functioning, its owner will be willing to exploit the investments made and to carry en rout a woman, a bomb or a bar of uranium, let alone such “ordinary” goods as footwear and wardrobe. Another way to employ profits from smuggling is to lend them to those who cannot lend from official sources. Shortly after the war against terrorism broke out, some newspapers in the U.S.A. published information that part of terrorist activities had been financed from illegal trade of tobacco products among the States. Similar opinions are cropping up as regards the origin of terrorist funding in Europe. So Lithuanian smugglers-bankers have ample opportunity to take into their pocket if not European, so at least Lithuanian villains.
Increased accessibility to smuggled cigarettes is a roadblock to achieve the goals of health care and juvenile prevention. One of such goals, sought by high excise duties on fuel, tobacco and alcohol products, is all governments’ desire to reduce overall consumption of these products for the purposes of environment protection and society’s heath care. Cheap illicit tobacco products close the door on this aspiration as significantly cheaper smuggled goods are frequently of poorer quality and more easily accessed by consumers than the legal ones.
The opponents of high excise taxes or small cigarette packages argue that cheap tobacco products will become obtainable by children who usually don’t have large amounts of money. But the opportunity to get cheap smuggled cigarettes without any control blocks the way for making tobacco goods as remote from youngsters as possible. Selling of cheap legal tobacco products to some extent can be controlled by disciplining salespeople and building a general environment of intolerance for structures that sell tobacco to teenagers. But it isn’t like that in the marketplace or in kiosks where cigarettes from under the counter can be purchased by anyone who is tall enough to hand in cash.
LFMI consistently advocates lower taxes for either sugar or tobacco products as it evaluates their impact not just on the consumer or producer alone, but also on the overall economy. Although it’s unpopular or even risky to talk about the reduction of excise duties on tobacco products, yet it is indispensable to look into the roots and the consequences of this problem.
It’s only a matter of time when serious debates will be launched regarding the effectiveness of policy on excise taxes and its effects on the security in the EU. Only a threat to security and the amounts of euros thrown at safeguarding the EU’s exterior border, being conducted by the new member states, will force the EU officials to speak about changing the course of the excise duty policy by starting to remove the minimal level that the new EU countries are to adjust.
Various calculations show that evaluating increased excise duties and higher income of Lithuanian households, tobacco products will be less affordable by Lithuanians in 2008, as compared with the current situation. Consequently, satisfying the needs of the expanding market of smuggled tobacco goods will be the major source of smugglers’ profit and Lithuanian government’s headache in the future. Most importantly, this headache should become an EU-wide ailment because the remedy – the decision regarding lower excise duties – rests in the corridors of the European Union.