Chapter

Taxation of Tobacco <sup>*</sup>

Sijbren Cnossen and Michael Smart

in Theory and Practice of Excise Taxation

Published in print February 2005 | ISBN: 9780199278596
Published online October 2005 | e-ISBN: 9780191602856 | DOI: http://dx.doi.org/10.1093/0199278598.003.0002
Taxation of Tobacco  *

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Cigarette taxes (specific and ad valorem excises plus VAT) in the EU at more than 300 per cent of the pre-tax retail price are the highest on any single product in the world (by comparison, the VAT is, on average, 19 per cent.) In the US, the overall average level is only half the EU level. Within the EU and the US, the level of cigarette taxation differs widely between states. Interestingly, the ad valorem excise is mainly an EU phenomenon; it tends to protect the cheap tobaccos grown in southern member states. Concern about revenue and the restraining effect high cigarette taxes appear to have on the young are the main reasons for the high level of tobacco taxation. The young tend to undervalue future health damage. But apart from this special case of information failure, the case for high tobacco taxes appears weak. If individuals are fully informed about the consequences of smoking, the net external costs, which allow for the cost savings of premature deaths, may be low or even negligible. Furthermore, illegal bootlegging and smuggling, which undermine public revenue and health objectives, have reached alarming proportions, particularly in the EU. Accordingly, the authors conclude that there are conceptual and empirical limits to excessively high levels of tobacco taxation.

Keywords: cigarette smuggling; cigarette taxes; European Union; social costs of smoking; specific tax; ad valorem tax; United States

Chapter.  16882 words. 

Subjects: Financial Markets

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