Economically and culturally smoking is considered to be a “norm” within society. The government has policies on cigarettes that try to help reduce smoking, but in an effort to make more revenue the taxes that are placed on cigarettes are not so high that consumer usage will drastically decline and affect government revenue.
The government has imposed quotas and tariffs on cigarettes to help regulate the importation of them. A country like the United States has a high border tariff, which the government likes, because its economic level of exporting is high. Countries that are considered to be third-world or developing nations tend to have low or no border tariffs on tobacco. By placing a tariff on tobacco, consumers lose, but the government earns income from it in the form of taxes. Quotas on the other hand, take some of what the consumers lose and give it to the suppliers who are fortunate enough to have their product shipped as part of the quota. For example, the few tobacco farmers in the United States who are granted quotas by the government earn a lot of money mainly because they have no shipping cost – government pays for their shipping cost.
The government knows that cigarettes are a bad commodity but since the government makes money off of it, taxes are put in place. The taxes are not only put in place for the government to make money but an effort to reduce smoking, particularly amongst young people (MBN, 9). Young people are targeted the most because studies have shown that 80% of adult smokers started smoking when they were teens. Tobacco companies also target teens because they are considered low-income individuals. A survey a few years ago shows that only 19 percent of people earning less than $50,000 per year smoked, while 32 percent of those earning less than $10,000 smoked (MBN, 9). Nicotine might be a very addictive drug, but higher prices make smokers think about buying packs of cigarettes. For each 10 percent that taxes push up in the retail price, the number of packs sold drops by 4 to 8 percent- also called price elasticity of demand (MBN, 9). Studies have shown that raising the taxes on cigarettes helps reduce smoking among teenagers and even adults. The tax hike also hopes to make the decreasing number of smokers annually increase.
To put into perspective just how much the government makes, look at R.J. Reynolds, the second largest US tobacco company. They stated that the US makes seven times more money off the sale of a pack of cigarettes than they do. The United States Treasury is estimated to have pocketed $118.6 billion in tobacco taxes the past 10 years (BBC News). This can happen because the demand for cigarettes among American smokers is very high. Not only does the government benefit from it but jobs are also provided. The tobacco industry provides 50,000 manufacturing jobs and about 136,000 farming jobs directly and generates another 400,000 jobs indirectly. Tobacco farmers enjoy a return per acre of about $1000, considerably more than other crops (BBC News). Not only is the United States government benefiting from the taxes, but other governments worldwide are too. In many countries in Western Europe 80 percent of the taxes from cigarettes goes to the government (also used for education and employment). The UK government generated enough money to help pay for three quarters of the Education and Employment budget. Not only did it help pay for the budget, but it also directly employs 9,800 people and supports about 138,500 other jobs (BBC News).
The other side of the story is that smoking cigarettes causes many healthcare problems, and the number of deaths generated by it far outweighs the financial benefits. For example, in a state like Massachusetts, twenty-five people die each day from tobacco-related illnesses and thousands of others suffer from related disease – emphysema, asthma, heart disease, cancer. Figures from the Campaign for Tobacco-Free Kids say that $96.7 billion is spent on public and private healthcare combined (Smith, 2008). The American people are also paying the cost. Studies show that $97.6 billion is lost in productivity, and each American household spends $630 a year in federal and state taxes due to smoking. (Smith, 2008).
The government policies on cigarettes have caused people to start smuggling them worldwide. This has hurt the government in their efforts to target young people to stop smoking. Smuggled cigarettes have a higher demand than the ones in stores because taxes are lower than store bought cigarettes. This makes young people (who end up smoking while they are adults) want to buy them and continue smoking instead of not wanting to buy the cigarettes in stores and stop smoking. Worldwide, smuggling also fuels organized crime and corruption which in turn hurts the government. For example, Paraguay has factories that produce more than 20 times what the country consumes and are responsible for 10 percent of the worlds contraband tobacco. Many of the world’s most violent actors are fed by the underground economy of smuggling cigarettes. Organized crime syndicates and terrorist groups such as the Taliban and Hezbollah facilitate global distribution and use the profits to finance their activities (Guevara, 2010). The supply of smuggled cigarettes worldwide is hard to control because since cigarettes are legal and factories make them, production will continue, meaning more cigarettes in the black market. More troubling is the impact that smuggling has on the public health crisis caused by tobacco. Governments put taxes to help reduce smoking, but when consumers get into the black market where supply and demand is very high because of the prices, then it encourages people to smoke more and more, making the governments plan inexistent. Underground factories in China and Eastern Europe manufacture billions of “fake” cigarettes. Many of the cigarettes have high concentrated levels of nicotine and are made from the lowest quality tobacco. (Guevara, 2010). The government is especially trying to stop consumption of cigarettes like these because the people will pay the cost in the end. The only problem is that since the supply is high and factories are set up in regions with weak controls and high levels of corruption, prices will continue to stay under government standard and demand will steadily rise for smuggled cigarettes.
Despite its broad impact on health, crime, and taxes, tobacco smuggling receives little attention from authorities. In some countries, cigarette smuggling is not even considered a crime. Nor is it a priority for law enforcement agencies, even in the West, which spend the majority of their resources tackling drug, arms, and terrorism cases. In the United States, for example, the Bureau of Alcohol, Tobacco, Firearms and Explosives devote only 2 percent of its personnel and budget to tobacco programs (Guevara, 2010).
Smuggling tobacco has a lot of costs, but cigarette companies worldwide see it as a benefit. It allows tobacco manufacturers to make their profit up front, when the product is first sold, and enables tobacco company lobbyists to press for lower rates of tobacco tax in the legal market, with the aim of boosting demand. They use the underground market as a distribution channel to launch new brands and fight price wars with their competitors. Smuggled cigarettes help the companies enter into markets they cannot legally, and help to increase the companies’ overall sales by providing smokers with cheaper cigarettes sold free from import duties and taxes (without reducing the cigarette companies’ own revenues or profits per pack). Once one company is involved, other companies have to join, or they risk losing market share in the legal and illegal markets. Cigarette smuggling also helps the big companies in that it helps keep prices lower, which promotes smoking and increases total cigarette company sales. In addition, the U.S. cigarette companies use the threat of smuggling and black markets sales as their most powerful weapon against federal or state cigarette tax increases.
As we have analyzed the costs and benefits of the cigarette production and distribution industry, it’s quite evident there are flaws. The flaws take shape in a derived demand for the smuggling and selling of illegal cigarettes on the black market, due to high prices from legal market cigarettes. The high prices of market cigarettes are due to the direct taxation of the products that both consumers and producers have to incur. The prices are raised in order for producers and suppliers to cover their costs with included taxation, quotas, and tariffs.

We strongly feel this would not occur if the taxation and price penalties (quotas & tariffs) were no longer placed on the cigarettes. The government policies need to be re-evaluated and re-established. In fact, the taxation and penalties need to be abolished. There truly is no need for them; all it is doing right now is causing harm and conflict. The longer it goes on, the worse the condition is getting. The illegal market for cigarette distribution is getting cleverer. The smugglers are becoming progressively innovative, crime rises in harmony with the demand for the illegal cigarettes, and government has less and less sympathy for the legal market. It seems like a downward spiral with no light at the end of the tunnel.

So, we reiterate, abolish the taxation on cigarettes. One may ask Why, and how then does one expect to lower the amount of cigarette consumption and the criminal activates indirectly related to the distribution of cigarettes?
Our solution is eradicate the quotas, tariffs, and taxation and instead, completely cut the supply of medical aid supplied, from government, to those who suffer from tobacco related illnesses or diseases. Understandably, this is a rather extreme approach, but an extreme approach is exactly what is needed. The downward spiral cannot continue. Government acts out of frustration and humiliation that it cannot control the black market and the producers of both legal and illegal cigarettes and reacts in a way that gives the producers more reason to carry on. How has no one or political party put a stop to this old way of thought? It seems immature and bravado in the sense that one party is trying to out-muscle the other in its own ways.
The benefits related to this approach are abundant. Government would no longer have to cover costs of tobacco related illnesses. Even if it is not the government directly covering those costs, it’s the insurance companies; the insurance companies’ demand loans from banks to cover the costs, banks demand money from the reserve banks, and in order to cover that, more money needs to be supplied – the process is a contributor to inflation, and this is a government issue. Due to smoking, the government also sets federal and state taxes up to $630 on American households, resulting in a $97.6 Billion loss in productivity.
The most obvious benefit would be the reduction in criminal activity related to the smuggling and selling of illegal cigarettes. In our new recommended government approach (or some could argue lack there of), We are in favor of the Laizzes-Faire environment for the market of cigarettes. The market of cigarettes should be allowed to flow freely, determined purely by price and influenced by demand, without the disturbance of the black market’s activities. This can be achieved by government taking away the taxation and penalties placed on cigarettes; leaving prices to be determined by the market and producers. The predicted result would be that prices would become highly competitive in order for cigarette production firms to stay afloat. The prices would eventually fall below that of the current illegal market prices, thus resulting in no need for the illegal market anymore. If there is no illegal market, then there are no criminal activities associated with it. The often unseen negative effect of illegal cigarettes is the demand for longer cigarettes with a higher nicotine and tar count. This way the consumers are getting more out of their money they spend. This demand would diminish when prices go down due to competitiveness of the firms.
Our ultimate goal for this approach is for consumers to be forced to realize that smoking would really be smoking at one’s own risk. If they decide to smoke, they are entering a danger zone voluntarily because if or when they get sick or contract an illness due to their smoking, there will be no coverage to their medical bills. It is not up to government or tax-payers to look after smokers and their addictions; the reality needs to set in that if they decide to satisfy their addictions, they will have to pay the costs on their own when it comes round.

We are well aware there are major costs to my government policy. One would argue that our biggest cost would be the cutoff of government funding via sin tax; and as a result we as citizens would feel the crunch. This; however, is not the case. Government has not only been taxing cigarette consumers but it has also filed several lawsuits against cigarette producers and has collected in excess of $246 billion over 25 years to be distributed to the States. (MBN, 9). The purpose was to help states with the promotion of anti-smoking campaigns. This is yet to take place. Infrastructure has taken place, college funds contributed to, and budgetary shortfalls have been eliminated but yet anti-smoking campaigns have been put on the back-burner. The stats i could find that illustrated the United States government using its taxation money are as follows: the Bureau of Alcohol, Tobacco, Firearms and Explosives devote only two percent of its personnel and budget to tobacco programs (Guevara, 2010). This is slightly pitiful.

In this government policy, the government loses out on two taxation revenues. The first, as we mentioned, is the taxation directly on the cigarettes; the second is the taxation proportion on households in order to cover the medical bills related to tobacco induced illnesses. However, with my new government policy, this taxation revenue would not be necessary. The first taxation revenue would not be needed to fight the crime involved in smuggling, due to the diminishing demand for smuggled cigarettes. The second taxation revenue would not need to take place or needed for the medical bills to cover those with tobacco related illnesses because the government would not be liable for those victims anymore.

There is another issue that requires necessary attention that we feel the government has overlooked in its current taxation process on cigarettes. The issue is that tobacco companies target teens because they are considered low-income individuals. A survey a few years ago shows that only 19 percent of people earning less than $50,000 per year smoked, while 32 percent of those earning less than $10,000 smoked (MBN, 9). This means that those 32 percent (smokers) who earn less than $10 000 per annum, have to pay the same amount of tax as those who earn over $50 000 or more. This is not fair but it is indirectly incentivized for them buy the cigarettes, knowing their medical bills will be taken care of they become ill from smoking. The taxation needs to be taken away; it does not need to become a luxury item, it needs to be fairly priced via the markets demand. We wouldn’t have to worry about those who earn less being used to the high prices and now they have lower prices and the product becomes more affordable for them. This would not be an issue because there would be a world-wide realization that they will not be able to afford the medical bills previously covered for them.

Our policy is one of extreme. It is fitting, though, in these times of extreme struggle and conflict. A policy needs to be implemented that will deflate conflict and naturally decrease the demand for criminal activities, such as the black market and the criminal activities related to it. This policy, if implanted and supported will take care of these issues.