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The perverse effect of sin taxes: the rise of illicit white cigarettes

AEI 2019.08.06
In this paper, we define illicit white cigarettes as cigarettes that are legal in the country of production, but that are illegally smuggled into other markets without the payment of applicable taxes. This paper analyzes whether taxes create a price wedge between legal and illicit cigarettes and thereby affect the availability and trade of illicit whites across markets. Through original, self-conducted point-of-sale surveys and discarded pack collections across 18 cities, we find that cigarette taxes significantly affect the market for illicit whites. Moreover, based on a smoker survey, we find that the illicit white market is supported by consumers’ willing to purchase illicit products for their reduced prices. It is beyond the scope of this paper to ascertain the optimal tax rates on cigarettes or the stringency of enforcement measures to reduce smoking rates (the desired health outcome). However, gaining a better understanding of the effects of taxes on illicit white trade and consumption is vital because our research suggests that current ‘sin taxes’ drive illicit activity and therefore reduce the effectiveness of higher taxes in curbing the use of cigarettes.

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