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Cigarettes taxes and smuggling in South Africa: Causes and Consequences

  • Craig Lemboe

    ()

    (Bureau for Economic Research, University of Stellenbosch)

  • Philip Black

    ()

    (Department of Economics, University of Stellenbosch)

The main instrument within the broader framework of tobacco control in South Africa has been the more aggressive use of tobacco taxes which since 1999/2000 have increased from 0.12 cents per cigarette to 0.38c in 2009/10. The primary goal of these policies is to reduce cigarette consumption and the attendant negative externality. National Treasury (NT) data seem to suggest that these initiatives and higher taxes in particular have been effective in reducing cigarette consumption. However, the official (NT) data pay little attention to the illegal cigarette market which in South Africa has long been assumed to be only a fraction of total cigarette consumption. Comparing an independent consumption survey with the NT data we find that the level of cigarette smuggling in South Africa is in fact significant, constituting between 40% and 50% of the total market, and that cigarette tax hikes have to a large extent contributed to its continued existence and growth by creating a financial incentive to smuggle. Furthermore, the well-established informal sector in South Africa - which developed under Apartheid rule and is characterised by strong networks with other African countries - implies that there is a greater ability and likelihood of consumers switching from consuming legal cigarettes to consuming illegal cigarettes following a tax-induced price increase. There is also much evidence indicating that illegal cigarettes are of inferior quality which, combined with the tax induced shift to smuggled cigarettes, suggests that cigarette tax hikes could have the perverse effect of raising rather than lowering the overall negative externality.

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File URL: http://www.ekon.sun.ac.za/wpapers/2012/wp092012/wp-09-2012.pdf
File Function: First version, 2012
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Paper provided by Stellenbosch University, Department of Economics in its series Working Papers with number 09/2012.

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Date of creation: 2012
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Handle: RePEc:sza:wpaper:wpapers161
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  1. Saba, Richard P, et al, 1995. "The Demand for Cigarette Smuggling," Economic Inquiry, Western Economic Association International, vol. 33(2), pages 189-202, April.
  2. Becker, Gary S & Grossman, Michael & Murphy, Kevin M, 1994. "An Empirical Analysis of Cigarette Addiction," American Economic Review, American Economic Association, vol. 84(3), pages 396-418, June.
  3. Becker, Gary S & Murphy, Kevin M, 1988. "A Theory of Rational Addiction," Journal of Political Economy, University of Chicago Press, vol. 96(4), pages 675-700, August.
  4. Iraj Abedian & Rowena Jacobs, 2001. "Tobacco taxes and government revenue in South Africa," Journal of Economic Studies, Emerald Group Publishing, vol. 28(6), pages 397-407, October.
  5. Corné Van walbeek, 2006. "Industry Responses To The Tobacco Excise Tax Increases In South Africa," South African Journal of Economics, Economic Society of South Africa, vol. 74(1), pages 110-122, 03.
  6. Wasserman, Jeffrey & Manning, Willard G. & Newhouse, Joseph P. & Winkler, John D., 1991. "The effects of excise taxes and regulations on cigarette smoking," Journal of Health Economics, Elsevier, vol. 10(1), pages 43-64, May.
  7. Willem h. Boshoff, 2008. "Cigarette Demand In South Africa Over 1996-2006: The Role Of Price, Income And Health Awareness," South African Journal of Economics, Economic Society of South Africa, vol. 76(1), pages 118-131, 03.
  8. Rajeev Goel, 2008. "Cigarette smuggling: price vs.nonprice incentives," Applied Economics Letters, Taylor & Francis Journals, vol. 15(8), pages 587-592.
  9. Pa Black & Ai Mohamed, 2006. ""Sin" Taxes And Poor Households: Unanticipated Effects," South African Journal of Economics, Economic Society of South Africa, vol. 74(1), pages 131-136, 03.
  10. Michael Grossman, 2004. "Individual Behaviors and Substance Use: The Role of Price," NBER Working Papers 10948, National Bureau of Economic Research, Inc.
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