CHANNEL 'TEA PARTY' FORCES BRITISH TAX RETREAT

The British government this week announced a tactical retreat in its
senseless war on "booze cruisers." Stop and searches of travelers for
contraband alcohol and tobacco would "end," it said, and British travelers
won't be endlessly harassed about their purchases on each return trip home
from across the Channel.

It's about time. In the 19th century, taxes on tea, gin and wine brought an
unwinnable war between smugglers and customs. In today's Britain, the war
on alcohol and tobacco is equally futile: there's little public support,
it's hard to tell who the smugglers are and there's an inexhaustible supply
of cheap material from nearby EU countries. While the recent British
retreat is a step in the right direction, the bad tax policies at the root
of the problem remain in place.

Like many island nations, Britain has a long history in piracy and
smuggling. Long before Adam Smith wrote about Free Trade, you might say
Britain's smugglers were already practicing it. The pirates are gone now,
but the trade is booming, thanks to Britain's insistence on taxing alcohol
and tobacco heavily.

Ironically, London encourages tax competition in the EU, and yet from the
start of the single market, has tried to prevent the flow of goods back
home from other EU countries with lower taxes. The Treasury and Her
Majesty's Customs and Excise (HMCE) got broad enforcement powers. Travelers
were allowed to bring to Britain limited amounts tax-free and, beyond those
low limits, had to prove they weren't smugglers. In most countries, this
burden falls on the law enforcement agents. Fritz Bolkestein, the EU's
internal market commissioner, last month threatened to take legal action
against London unless these draconian measures were withdrawn, noting that
bargain hunting ought to be legal in a single marketplace.

The policy may or may not go against EU norms: As a tax-gathering measure,
it has been a clear failure. While government tax receipts are up 70% since
1992, the last year before the start of the single market, tobacco receipts
grew by a paltry 18% and alcohol only by 32%. The real story here is the
growth of smuggling.

Some 17 billion cigarettes a year, or about one in every five cigarettes
smoked in Britain, are smuggled into the U.K. The HMCE estimates the
overall loss to smuggling at £2.7 billion a year. Throw in the lost 17.5%
VAT that would have been paid at retail outlets. About three million
Britons take these "booze cruises" to France and Belgium each year to stock
up on cheap alcohol and tobacco. Britons can bring back, say, 10 liters of
spirits and one kilogram of tobacco tax free. With anything more, the HMCE
demands proof that it's for personal use.

As implied by the 22,000 vehicles impounded by customs over the last three
years, it's not easy to prove. The HMCE's power to decide whether you are a
smuggler or an honest tax-free shopper is purely arbitrary. Only now the
government is waking up to this absurdity. While Britons don't care whether
alcohol and tobacco gets smuggled in or not, the same can't be said for
narcotics. And unlike beer, Britain doesn't combat drugs effectively. If
customs officials weren't so otherwise preoccupied, they could focus on
narcotics. That's a far better use for the 1,100 extra staff hired last
year who were brought on to fight the silly war on booze and smokes.

More importantly, eliminating these sin taxes would help the British
economy. The government could, for example, cautiously cut duties over the
next four years, giving time for all interested parties such as the ferry
companies and French and Belgian retailers to adapt their business.
Fiscally, the challenge is to get Britons to buy their drinks and
cigarettes at home so they contribute the VAT and Corporation Tax. The
booze cruisers also drain the economy through days off work, one-way
capital flows to the Continent and the continued declining business of
small shops and pubs.

The British government is already close to defeat with growing pressure
from the law courts -- Hoverspeed, the ferry operator, brought a case
coming before the courts early next month -- and the European Commission.

History suggests an even easier way out. In 1784, Prime Minister William
Pitt the Younger advised by Adam Smith reduced the import duty on tea to
12.5% from 119%. Smuggling of tea ended overnight. In 2002, it's time for
Britain to do the same.

Mr. Lewis, a former Treasury analyst, is a journalist in London.