Cig­a­rette taxes aren’t the prob­lem

Financial Mail - - YOU SAID... - Hana Ross (PHD) & Corné Van Wal­beek

We read “Smokin’” by Tim Co­hen (Cover Story, Novem­ber 22-28) with great in­ter­est.

As our study es­ti­mat­ing the size of the il­licit cig­a­rette mar­ket is re­ferred to in the ar­ti­cle, we would like to clar­ify a few is­sues.

We agree with much of the con­tent of the ar­ti­cle, but dis­agree about the rea­sons for the re­cent in­crease in il­le­gal cig­a­rettes sales in SA.

The ar­ti­cle in­cor­rectly adopts the in­dus­try’s nar­ra­tive by point­ing to to­bacco taxes as the cul­prit and cause of the rise in il­licit mar­ket share. It misses the point that the real prob­lem of “il­lic­its” in SA only be­gan when cig­a­rette taxes were ris­ing min­i­mally, barely above in­fla­tion.

Taxes are not to blame here. It is the weak­ness of SA’S tax ad­min­is­tra­tion that caused the prob­lem, and only ad­dress­ing that weak­ness will help re­cover the tax losses. We see the same sit­u­a­tion all over the world. Cam­bo­dia, for ex­am­ple, has one of the low­est cig­a­rette taxes in the world, but has a boom­ing il­licit cig­a­rette mar­ket be­cause its tax ad­min­is­tra­tion is not func­tion­ing prop­erly. Re­search shows a clear link be­tween the de­gree of cig­a­rette tax eva­sion and the level of cor­rup­tion.

As Co­hen cor­rectly points out, the gap method we used to es­ti­mate the size of the il­licit trade mar­ket re­lies on many as­sump­tions. Wary of the lim­i­ta­tions of the method, we em­ployed an­other method that, like the method used by the in­dus­try, re­lies on cig­a­rette prices to dis­tin­guish be­tween le­gal and il­le­gal cig­a­rettes. We found that 30% of the mar­ket was il­le­gal in 2017, while the gap method led to an es­ti­mate of 40% in the same year.

Try­ing to fig­ure out the dif­fer­ence, we re­vis­ited the is­sues of mea­sure­ment.

The study com­mis­sioned by the To­bacco In­sti­tute of South­ern Africa (Tisa) uses cig­a­rette sell­ing price to dis­tin­guish be­tween le­gal and il­le­gal cig­a­rettes — any­thing sold be­low R17.85 is clas­si­fied as an il­le­gal prod­uct. If a prod­uct is sold above this price but is not de­clared to the SA Rev­enue Ser­vice (Sars), it is an il­le­gal prod­uct, but would be er­ro­neously clas­si­fied as le­gal us­ing the Tisa study’s method­ol­ogy.

Our gap anal­y­sis is dif­fer­ent. It clas­si­fies any not-tax-paid prod­uct as il­le­gal. As we found more il­licit cig­a­rettes with the gap anal­y­sis com­pared with the price-based meth­ods, some il­le­gal cig­a­rettes are ev­i­dently be­ing sold above the thresh­old price.

Tisa blames small op­er­a­tors rep­re­sented by the Fair Trade In­de­pen­dent To­bacco As­so­ci­a­tion for sell­ing with­out pay­ing tax, but it has the same in­cen­tives to evade the tax, as sug­gested by the pre­vi­ous Sars in­ves­ti­ga­tions. And if Tisa’s mem­bers are sell­ing above the thresh­old price, tax-paid sta­tus is al­most im­pos­si­ble to es­tab­lish.

Aca­demics and the in­dus­try can keep quib­bling about method­olog­i­cal de­tails. But it is at best a sideshow be­cause cig­a­rettes in this coun­try are be­com­ing in­creas­ing af­ford­able, dam­ag­ing more lives and in­flict­ing more suf­fer­ing. There is a sim­ple so­lu­tion to stop this: con­trol­ling the sup­ply of cig­a­rettes us­ing mod­ern tech­nolo­gies. A proven track-and-trace so­lu­tion would cost less than R1 a pack and re­cover bil­lions of rands in un­paid taxes. That kind of re­turn on in­vest­ment should be hard to pass up.

on be­half of the eco­nom­ics of to­bacco con­trol pro­ject, Univer­sity of Cape Town

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