TURNING SMOKERS INTO CRIMINALS

In a few days the United Kingdom's Police Foundation will release a report
recommending the depenalization of marijuana supply. At a time when half a
million nightclubbers are estimated to pop an ecstasy tablet every weekend,
and smoking the odd joint is positively middle-class, a prison sentence for
supplying these mood-enhancers seems something of an anomaly to many
policemen. Most of the public agrees. Only 17% of respondents to a recent
MORI poll said they thought that cannabis possession should remain illegal.

But while enlightened liberals can't be bothered about the use of soft
drugs, they are positively zealous about stamping out tobacco -- which is
enjoyed by a third of the UK population. Punitive taxation policies, while
not overtly prohibitionist, hound the smoker in Britain almost as much as in
Zen California. Trouble is, these laws are creating some of the same
problems associated with soft drugs -- they are making criminals out of
users and suppliers. Here is how.

Paying for a Holiday

I could take an extra suitcase on a short break to Spain and fill it with
premium brand cigarettes. Provided I knew to whom to sell when I got back to
London, I could cover the cost of my holiday. If I were stopped by customs,
and failed to convince them that I was only carrying the supply for myself
and my travelling companions, I'd have to pay the extra duty. Of course, as
an amateur smuggler I might easily be deterred by higher detection rates or
stiffer penalties. But the regulations have created a potential for such
great profit that organized crime is moving in -- some even diversifying
from drugs -- and, unlike middle-class medical demographers, they don't
scare so easily.

What's more, they operate in bulk, depriving the U.K. government of over 1.5
billion pounds in tobacco revenue every year, not to mention reducing the
profits of U.K. retailers and producers. So this may not be just an issue of
liberties, but also of economics. The Laffer Curve, which determines that
raising tariffs may get you lower returns, seems to be operating here.

The average duty-paid price for a pack of 20 cigarettes in Britain is 3.80
pounds ($6.20); in Spain it's 2 pounds ($3.26). Elsewhere, prices are even
more attractive: in Luxembourg 1.40 pounds ($2.28), Andorra 1 pound ($1.63)
and Tenerife only 70p ($1.14). The highest profits to smugglers are to be
made on cigars, with 50 boxes of Havanas, easily packed into a small family
car, yielding a profit of 5,000 pounds ($8,170). Customs and Excise
officials at Dover see around 9,000 vehicles drive off Channel ferries every
day. They manage 500 prosecutions per year for alcohol and tobacco
smuggling, and estimate that they are stopping a meagre 5% of contraband
entering Britain.

Smuggling tobacco is especially attractive since the product is legal, and
easier to sell than drugs. EU citizens travelling between member countries
can buy just about as much alcohol and tobacco as they want -- for personal
consumption. Tobacco is easy to store, it can be transported in numerous
ways, and consumers are used to paying a 50% to 500% mark-up in taxation --
leaving an enormous margin for the middle-man willing to evade the revenue.
The maximum penalty for smuggling alcohol and tobacco is nine years, while
drug smuggling can cost a life sentence.

According to the World Health Organization's Director of Tobacco Control,
Derek Yach, about a quarter of the adult world are smokers, a market
approaching $400 billion a year. In Britain, tobacco taxes yield a revenue
of over 10 billion pounds a year, but a government that treats smokers as
social pariahs should not be surprised at smokers' willingness to cheat the
tax man.

To assess the proportion of contraband cigarettes in the market, the UK
Tobacco Manufacturers' Association did some down-to-earth research. It
collected empty cigarette boxes after football matches: Liverpool's fans
topped the contraband table with 25%, London clubs averaged 15%, and Ipswich
managed a modest 5% penetration.

While it is clear that part of the problem lies with the tax differential, a
politically acceptable solution remains elusive. Reducing tax on tobacco
seems unlikely as serial increases are ostensibly part of health policy, and
might lead to the inference that smoking was not so bad after all. Another
alternative might be to persuade other EU members to increase their tobacco
duty -- to harmonize, in the preferred lingo of some EU bureaucrats --
although why they should when they benefit from the mess Britain has created
for itself is not immediately clear.

Meanwhile, recommendations at the international level side-step the issue.
Anti-tobacco advocates such as WHO's Mr. Yach propose large tobacco-tax
increases around the world, and to reduce the incentive to smuggle they
demand harmonization. But the greater the tax, regardless of harmonization,
the greater the incentive to smuggle, no matter how high the penalty.

Perhaps more mischievously, members of Mr. Yach's team claim that
manufacturers are using illegal cigarettes to establish market share in
countries where they don't have a license to sell. Their evidence is based
on a few bad apples from the tobacco industry who have allegedly been party
to smuggling. But even if true, this does not make the entire industry
equivalent to the rum-runners of 1920s America. Yet because the media have
so readily reported anti-tobacco's allegations, advocates have convinced the
world that big tobacco is so crooked that it cannot be believed on anything.
Legitimate companies, smokers and national treasuries are losers from
tax-induced illegal trade; the winners are criminals.

Smoking is Here to Stay

It all makes one wonder where the tobacco industry will be in 20 years. If,
as tax rates continue to rise, more and more of the demand is supplied
illegally, we are more likely to see a fiasco similar to America's
prohibition. Illegal suppliers will gain greater control, encouraging
protection rackets, counterfeiting and poorer quality goods. Already,
Chinese counterfeit name-brand cigarettes have been confiscated. Profits
will fall for the major tobacco companies until they slip out of major
pension-fund portfolios, are consolidated in take-overs, and wither under
litigation expenses.

But smoking will almost certainly continue. New companies, not subject to
current litigation, will spring up and provide a new generation of smokers.
Who knows, maybe the intellectuals of 2020 will be demanding easier access
to tobacco to remove the lure of forbidden fruit from youth. One thing is
for certain: demand for tobacco is not going to disappear.