July 20, 2014 by Paul Goldsmith
When Arthur Laffer speaks about tax, people listen. So when he delivered his opinion that tobacco taxes could be too high in the UK in his Handbook of Tobacco Taxation: Theory and Practice, which he launched in London yesterday, he got quite a hearing from the national press. However, when an economist reads a report like Laffer’s it is worth asking the question of who is funding it. Arthur Laffer doesn’t come cheap, and the answer to the question of who is getting him out of bed is instructive.
First of all, The ‘Laffer curve’ is a simple way of explaining the relationship between the rate of tax charged and the revenue that the government might get from it. It was so coined when he drew it on a napkin during a meeting with some staffers who worked for President Ford in 1974, and Laffer acknowledges the work of Ibn Khaldun and John Maynard Keynes in creating the curve. Its main use has been in explaining why high income tax rates reduce income tax revenues, supposedly due to the reduction in incentive to work as the government takes a higher proportion of a worker’s income in tax, as well as increasing the incentive to avoid the tax. It can also be applied to VAT and other excise duties such as those for alcohol and cigarettes .
Which is why the press were summoned to hear Laffer introduce his report, which claims that in candy countries tobacco taxes should be lower in order to maximise government revenues from them. He uses some perfectly rational economic analysis (click here for the press release on this) to explain his case, mentioning for instance the revenue that can be lost to smuggling or black market sources if the tax is too high, possibly leading to more smoking as well as lower revenue, and not allowing any product ‘loopholes’ so that a company can pretend their product is not eligible for the tax. Laffer suggested in particularly that tobacco taxes in eye UK are past the point at which higher taxes become counterproductive, what Laffer calls the ‘prohibitive range’ of the curve.
So, does that mean the UK Government should now drop tobacco duty to a lower level? Given Laffer’s eminence, you might imagine they would be thinking about it. But then they might want to take notice of two little facts about this research. First, it was funded by $350,000 from Phillip Morris, the owner of Marlboro Cigarettes. Secondly, the launch was hosted by the Institute of Economic Affairs, a libertarian think tank which itself is part-funded by the major tobacco companies and led by the chain smoking Mark Littewood. Laffer freely confesses these links, and points out that he quit smoking 40 years ago and had watched his mother die of cancer. But I would still look at this research with some scepticism, and a voice in my ear whispering ‘follow the money’.