Laffer's International Tobacco Taxation Handbook Gives Governments Roadmap to Optimize Tax Revenues

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LONDON, July 17, 2014 /PRNewswire/ -- As excise taxes become increasingly important throughout the world, Dr. Arthur Laffer today released his international tobacco tax handbook, cautioning that "one size does not fit all" in tobacco tax policy and offering governments practical examples and case studies to consider in order to optimize tobacco excise tax revenues. 

"Tobacco taxes represent an essential source of tax revenue for most countries across the globe," Laffer said during today's release of his Handbook of Tobacco Taxation – Theory and Practice. "Governments levy excise taxes on tobacco to achieve fiscal and public health objectives. Because the goal of reducing smoking incidence cannot be understated, this handbook is for everyone interested in setting tobacco tax policy as it focuses on using tax as the solution to the tobacco consumption problem." 

Laffer found that the unique aspects of tax structure and economic environments make taking a blanket approach to tax levels or tax systems unadvisable. Instead, governments should tailor their approach to tobacco taxation, taking into consideration a range of factors.

"It's important to think twice about the mounting pressure on the international level to create an overarching tobacco tax structure and level for every country across the globe," Laffer also said.  "One size does not fit all.  Tobacco regulation and taxation are complex matters that require consideration of a number of political, economic, and demographic factors prior to deciding on tax structures and levels."

The Laffer Curve illustrates the relationship between tax rates and tax revenue. In most instances when tobacco rates are increased, government revenue increases. However, there are increasingly examples of countries, including the UK and Ireland, whose rates have entered the so-called "prohibitive range" of the Curve. 

"When setting tax levels, dramatic increases can be counterproductive," Laffer said. "Once tax levels are in the prohibitive range of the Laffer Curve, tax revenues will fall.  If consumers shift to lower taxed or black market products, the tax increase may not even lead to less smoking."

Laffer's handbook advises governments to construct their tax systems based on four principles.  These include:

1. CLEAR PRODUCT CATEGORIES – So that revenue is not lost in "loophole products," setting precise tobacco product category definitions while amending and updating these categories.
2. SOLID TAX STRUCTURES – The excise tax structure should support stable and predictable collections and ensure, as much as possible, that excise tax increases translate into government tax revenue increases.
3. CORRECT TAX LEVELS – To prevent consumers from turning to lower priced products on the black market following tax increases, ensure the correct tax level is applied to each category.
4. EFFICIENT COLLECTION SYSTEM – To minimize administrative burdens on tax payers and tax collectors, and ensure efficient payment of tobacco taxes by all manufactures and importers.

SOURCE The Laffer Center at PRI