The Sin Taxes That Could Save Greece

The coun­try is a ma­jor hub for the global trade in il­licit cig­a­rettes “It creates a big pub­lic rev­enue hole that tax­pay­ers have to fill”

Bloomberg Businessweek (Europe) - - GLOBAL ECONOMICS -

On an or­di­nary morn­ing on Stournari Street in down­town Athens, only a few blocks away from the epi­cen­ter of ev­ery riot the city has seen dur­ing the years of cri­sis, a man of Asian ori­gin po­litely and openly of­fers cig­a­rettes to passersby. The Chi­nese-made RGD smokes cost €1.50 ($1.70) a pack taxfree, less than half the taxed price of 20 Marl­boros or Lucky Strikes at one of Greece’s street kiosks. More than 4 bil­lion il­le­gal, un­taxed cig­a­rettes are sold in Greece each year, ac­cord­ing to Philip Mor­ris In­ter­na­tional’s Greek af­fil­i­ate, Pa­pas­tratos Aves. The im­port duty alone on those 4 bil­lion would bring €670 mil­lion in an­nual rev­enue.

Greeks could smoke, drink, and gam­ble their way out of their fi­nan­cial trou­bles, if only they paid the taxes on those habits. “Il­licit cig­a­rettes strip the Greek state of sig­nif­i­cant rev­enue that could be used for pay­ing pen­sions, salaries, and so­cial ben­e­fits,” says Iakovos Kar­garo­tos, vice pres­i­dent of Pa­pas­tratos. “It creates a big pub­lic rev­enue hole that tax­pay­ers have to fill.”

The govern­ment of Prime Min­is­ter Alexis Tsipras promised to erad­i­cate pock­ets of cor­rup­tion and im­prove tax col­lec­tion as a con­di­tion of Greece’s lat­est bailout by the euro area and the In­ter­na­tional Mon­e­tary Fund. His fail­ure to clamp down on tax eva­sion—on cig­a­rettes, al­co­hol, and smug­gled fuel as well as in­come and cap­i­tal gains—has forced the govern­ment to im­pose more belt­tight­en­ing. Tsipras’s lat­est pro­pos­als to raise manda­tory pen­sion con­tri­bu­tions and in­crease taxes on farm­ers have sparked protests by farm­ers, whitecol­lar pro­fes­sion­als, and work­ers, bring­ing the coun­try to a stand­still.

Doubts over Tsipras’s abil­ity to push through bud­get cuts and tax hikes with­out los­ing his ra­zor-thin ma­jor­ity have con­trib­uted to a sell­off in govern­ment bonds and stocks, push­ing prices to 25-year lows. Bank shares lost more than half their value this year through Feb. 8, as Tsipras strug­gled to sat­isfy cred­i­tor de­mands.

A thriv­ing street mar­ket in con­tra­band cig­a­rettes, called “il­licit whites,” is just a 15-minute stroll from par­lia­ment. They orig­i­nate in places such as China, Egypt, and Pak­istan, reach­ing Greece on smug­glers’ “ghost ships” that pass on their cargo to smaller boats wait­ing off­shore.

Greece has one of the high­est rates of smok­ing in the world. More than 20 per­cent of cig­a­rettes smoked are coun­ter­feit, con­tra­band, or un­taxed, ac­cord­ing to a Nielsen study cited by the lo­cal to­bacco in­dus­try.

The best thing Greeks could do for the econ­omy is quit. The cost of smok­ing, in­clud­ing hos­pi­tal stays and lost work­ing hours, is more than €3 bil­lion a year, es­ti­mates Kostas Athanasakis, a re­searcher at the Na­tional School of Pub­lic Health. The Min­istry of Fi­nance didn’t re­spond to re­quests for com­ment. Tack­ling il­le­gal trade in ev­ery­day prod­ucts such as cig­a­rettes should be sim­ple com­pared

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