Cigarettes taxes and smuggling in South Africa: Causes and Consequences

Stellenbosch Working Paper Series No. WP09/2012
 
Publication date: 2012
 
Author(s):
[protected email address] (Bureau for Economic Research, University of Stellenbosch)
[protected email address] (Department of Economics, University of Stellenbosch)
 
Abstract:

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.

 
JEL Classification:

H23; I18

Keywords:

externalities, cigarette smuggling, illegal market, tobacco control

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BER Weekly

11 November 2019
Notwithstanding the apparent optimism surrounding President Cyril Ramaphosa's second Investment Conference last week, economic data released for Q3 disappointed. The consumer turned notably more pessimistic during the quarter, while the latest activity data from the country's secondary sector also paints a dismal picture for GDP. On the global front,...

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