Cigarette Tax in Ireland

After reading both articles from The Irish Times written by Eugene Regan and Chris Macey on the issue, should cigarettes be taxed so highly by the government with over 80% of the price of cigarettes is from the taxes that the government set.
This issue has caused a lot of discussion amongst us Economists. The argument is whether or not you think cigarettes are price inelastic or price elastic. If you think cigarettes are price inelastic which means that the change in price of cigarettes is disproportionate to the demand for cigarettes then you believe in Mr. Regan opinion. The price elastic view is taken up by Mr. Macey where he believes that the demand for cigarettes is very much dependent on the price.
Both articles but forward two very good arguments with very clear reasons why they think the government should try and stop this high growth of criminal activity in the area of smuggling cigarettes into the country.
As we found out from the articles that there is a very high percentage of contraband cigarettes in existents in Ireland today due to the very high price set by our government. Over a quarter of all cigarettes smoked in Ireland are illegal. Irish criminal gangs our making huge profits by selling smuggled cigarettes into the Irish black market (worth over €526 million to these criminal gangs) and the government need to do something about. Both articles try to solve this problem with very different views.
Reading both articles I do think that Exact A by Mr. Regan has a much stronger case with very good points in this current economic climate that I do agree with but I also would take on board some of Mr. Macey ideas as well.

As I said before the cigarette black market in Ireland is worth over €526 million which is a lot of money that the government could do with instead of criminal gangs which creates more criminal activity due to the money creates more power for them. I would much rather see it in the governments hands.
Mr Regans points are clear and simple. He believes that cigarettes are price inelastic which I do believe myself. I believe that cigarettes our price inelastic because there is little substitutes for them and also they are addictive. If some is addicted to cigarettes it is very hard to give up and people will pay the extra amount or in the case of price decrease everyone knows the health warnings about smoking and younger generations have a better attitude to smoking and there is less and less younger smokers in Ireland due to anti-smoking campaigns in schools across the country. He states that if you decrease the price of cigarettes down to the European average price of a box of cigarettes, which is €4.25 a packet, it will get rid of the incentive of criminal gangs to smuggle in cigarettes into Ireland. People won’t take the risk and buy contraband cigarettes instead they will go to their local shop and buy locally due to the fact they will be half the price they use to be. There is many spin off advantages to this tactic due to the fact people are now buying locally the Government has created more business for the local small shops which in turn helps the economy and helps the small towns in Ireland.
By the government decreasing the price by half then you can say that the government will be losing half of the revenue from the cigarettes but because people are now buying locally the black market for cigarettes will have diminished and the money that was going to the balck market will now be going to the government which will make up for lose of earnings.
Also Mr. Regan states that there has been suggestions that the Garda resources should be redeployed from areas such as road traffic policing into enforcement of the trade laws which Mr. Macey agrees with, Mr Macey states that we must give the customs and the Gardai the manpower and equipment to deal with smuggling. Mr. Regan makes the point if you get rid of the incentive to smuggling in cigarettes to the country there will be no need to spend unnecessary expenditure that the government already doesn’t have.

“Were the Government to adopt a policy of reducing prices to destroy the illegal trade of cigarette smuggling, it would restore lost Government revenue, reduce the pressure on the scarce resources of Garda and Customs and restore the rule of law in the area of cigarette sales in this country.” (Regan, 2012, The Irish Times)

A good point that Mr. Macey brings across in his article is that of the health risk to do with smoking. He states that “legal cigarettes which kill more people than the next six biggest causes of preventable death put together, including alcohol, obesity and illegal drugs”. (Macey, 2012, The Irish Times) This point is very valid and there is a lot of health risks to do with smoking but there is other ways to prevent people from smoking then to increase price so that it creates a black market for criminals to get wealth from.
Other ways that the government have tried to prevent people from starting or continue smoking is the law that you can not smoke in your work place. This law has become very effective and many other EU countries followed Irelands example.
The government have also spent a lot of money in anti-smoking campaigns to prevent young before from smoking and there is a good proof that the campaigns are working.
I do agree with Mr. Regan and I do think the government should revalue the price of cigarettes in the market to see if they can get rid of the black market.

The Revenue in 2011 released a report written by Padraic Reidy and Keith Walsh called ‘Modelling the Market for Cigarettes in Ireland’. I read the entire report and it was very interesting. The study was a time series demand analysis for taxed cigarettes in Ireland using aggregated data. The focus of the study is on Irish cigarette consumption and how changes in the pricing and laws affect the consumption.
At the very start of the conclusion it states that the black market on cigarettes has increased considerably since 2002 something needs to be done about it. Regarding the future of tax on cigarettes in Ireland the government will definitely want to be trying to control the black market and decrease it as much as possible.

“There is an array of factors that affect the demand for cigarettes in Ireland. What is clear from this report and the results of the research is that consumption of taxed cigarettes in Ireland has decreased since 2002.” (http://www.revenue.ie/en/about/publications/tobacco-market.pdf)

We know there are many ways to do this from the 2 articles that we have already read but from this report it states that the government can not rise taxes higher due to the fact the that consumption of non-taxed cigarettes will increase.

“Taxation of cigarettes is an important source of revenue for the Irish Exchequer. From the analysis in this report, increasing cigarette prices will lead to lower taxed consumption as some smokers consume fewer cigarettes and others substitute to untaxed cigarettes.”(http://www.revenue.ie/en/about/publications/tobacco-market.pdf) The report suggests that higher cigarette taxes in Ireland will no longer produce lower rates of smoking and benefits to the public finances. In fact it will do the opposite. So from my economic knowledge and from this report I will say that the government will not raise cigarette taxes instead steady them they will not reduce the tax due to lose of earnings to the Exchequer. In this economic climate the government are trying to create as much revenue as possible for themselves and as I said before the cigarette taxation is one of the biggest revenue creates they have.

The implications for Ireland if there was any change to the cigarette tax would impact the country greatly. If the government either increase or decreased the cigarette tax would cause big differences to the country that is why I said before that I think the government will leave the cigarette tax for the time being.
If the government decided to increase the cigarette tax in the morning the amount of people not buying cigarettes from local shops and instead buy contraband cigarettes for cheaper to feed their habit would increase greatly. The black market will grow considerably with the new criminal gangs taking the opportunity to exploit the high Irish cigarette tax by smuggling from abroad. While the government will be creating more money from the high taxes from the cigarettes the lose of people buying cigarettes will be greater which in turn will decrease revenue.
If the government decide to decrease the price of cigarettes in the morning will cause more revenue for the government. More people will purchase taxed cigarettes instead of the contraband cigarettes the government will make up the loss in earnings with the greater demand of them.
The black market for cigarettes will steadily decrease will criminal gangs not able to afford to smuggle in cigarettes due to the fact they are cheaper to buy in the local shops.
From my point of view and can really see that it would be great idea of the government would lower the tax on cigarettes but it won’t happen due to this argument that started from the start whether or not people think that cigarettes our price inelastic or price elastic.
For the amount Ireland stay with one of the highest prices of cigarettes in Europe and very high rates of contraband cigarettes (1/4 of cigarettes are contraband) and I can’t see this changing for a very long time due our culture and government.

Bibliography:
- (http://www.revenue.ie/en/about/publications/tobacco-market.pdf, accessed on Thursday,11th April 2013, 15:42pm, Economics of Tobacco, Reidy and Walsh, 2011, pg 29)
- Puff, A magic answer to irish trade crime: cigarettes at €4, Eugene Regan, 2012.
- Increase Taxes on cigarettes and get tough with smugglers, Chris Macey, 2012.