Liquor and Cigarettes – Reduce taxes

Governments around the world are strapped for cash. Finance ministers, find liquor and tobacco the easiest ‘sins’ to tax. Who can object? Cigarette and liquor companies should be glad they are allowed to exist and be happy that they are merely taxed. Right?

Wrong. The higher the taxes on ‘sins’ the more difficult it is for them to serve any purpose. Ban smoking and drinking and all you do is to drive the liquor and cigarette trade into the hands of criminals.

Whether it be Nepal, India or the US, people do not like to be dictated to and will not give up their habits. We have the right to do what we want with ourselves and will not surrender this freedom.

Prohibition, wherever it might be enacted, leads to gangs and thugs controlling the supply and distribution of liquor, and corrupting the enforcers. Tragic deaths result as people drink illicit spirits manufactured clandestinely without regard to quality. Consumption is not curbed.

In, 1920, the US enforced prohibition. Mafia spread its tentacles across America. Money earned from the illegal liquor sales helped it to establish itself in many other illegal activities as well.

Those were the days made famous by Al Capone and Bugs Moran – the most notorious and ruthlessly efficient suppliers of liquor.

Nobel laureate economist Milton Friedman talks about that era in Free to Choose: Who were their customers? Who bought the liquor they purveyed illegally? Respectable citizens who would never themselves have approved of, or engaged in, the activities that Al Capone and his fellow gangsters made infamous. They simply wanted a drink. In order to have a drink, they had to break the law. Prohibition didn’t stop drinking. It did convert a lot of otherwise law-abiding citizens into lawbreakers. It did confer an aura of glamour and excitement to drinking that attracted many young persons. It did suppress many of the disciplinary forces of the market that ordinarily protect the consumer from shoddy, adulterated, and dangerous products. It did corrupt the minions of the law and create a decadent moral climate. It did not stop the consumption of alcohol.

States in India continue to experiment with prohibition – on again, off again. Be it Gujarat, Maharashtra, Tamil Nadu or Haryana, experiments with prohibition go on. Will they ever learn?

Whether it is outright bans, restrictions or confiscatory taxation, the burden falls disproportionately on the poor. The rich will obtain their supplies of Scotch from regular contacts with links to embassies, smugglers and foreign returnees.

The poor have to depend on illicit hooch as they cannot afford the highly priced imported stuff nor the heavily taxed, local factory distilled brands. We have seen media reports of tragedies with hundreds of people taken ill, blinded or dying after consuming bootlegged liquor.

Cigarettes, though not banned, are heavily taxed. Tobacco companies serve as revenue collectors of the government as the duties are many multiples of the basic price. The better the brand the higher is the tax rate. The burden again falls on the poor. They are forced to smoke beedies or cheap cigarettes without filters which are even more injurious to health.

In the US misguided activism and high tax burden on tobacco companies have resulted in an increasing number of people, especially the young, moving to smoking Indian made beedis. What is good for India’s exports is disastrous for America’s youth. Beedis have more chemicals and carry far more health risks for smokers than cigarettes.

In Nepal few people can afford quality cigarettes and therefore for most smokers the option is to go for cheaper, killer varieties or buy smuggled products on which no duty has been paid.

The results everywhere, without exception, are the same. Ban a popular activity such as drinking or smoking and you drive it underground. You do not stop it. Raise taxes unreasonably and the effects are much the same. Smuggling and tax evasion become the norm.

The answer is to tax cigarette and liquor much the same way as you would tax potato chips and chocolates which too are harmful. Uniform low taxes just work better irrespective of what you are taxing.

The Himalyan Times