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Cigarette Taxes And Illicit Trade In Europe

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  • James E. Prieger
  • Jonathan Kulick

Abstract

Cigarettes are highly taxed in Europe, but at higher prices some consumers substitute more toward illicit cigarettes. The illicit retail trade in cigarettes (IRTC) includes counterfeit, untaxed, and smuggled cigarettes. Some existing literature includes claims that taxes are not an important determinant of IRTC. Using data from the European Union, we find the opposite: raising prices leads to substantial increases in IRTC. A €1 increase in tax/pack is expected to increase illicit market share by 5 to 12 percentage points and increase illicit cigarette sales by 29% to 95%. The results are robust to alternative specifications and data. (JEL I18, H26, K42)

Suggested Citation

  • James E. Prieger & Jonathan Kulick, 2018. "Cigarette Taxes And Illicit Trade In Europe," Economic Inquiry, Western Economic Association International, vol. 56(3), pages 1706-1723, July.
    • Handle: RePEc:bla:ecinqu:v:56:y:2018:i:3:p:1706-1723
    DOI: 10.1111/ecin.12564
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    References listed on IDEAS

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    4. Recher, Vedran, 2020. "Illegal tobacco demand: The case of Western Balkan," Economic Analysis and Policy, Elsevier, vol. 66(C), pages 182-193.
    5. Davor Mikulić & Goran Buturac, 2020. "In What Measure Is Public Finance Sustainability Threatened by Illicit Tobacco Trade: The Case of Western Balkan Countries," Sustainability, MDPI, vol. 12(1), pages 1-19, January.

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    More about this item

    JEL classification:

    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

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