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Seventeen years ago I was asked to debate the issue of smoking in Quebec and specifically was asked why the imposition of taxes did not and could never be a solution.聽聽The large tax imposed at the time neither reduced smoking, increased government revenues or diminished smoking among the young.聽As is happening today, it led to a great deal of聽smuggling and the inevitable聽undesirable side-effects of such actions.

Here is a brief review what happened in Quebec 17 years ago. The condition continues to take place in Canada and elsewhere today.

A carton of cigarettes then sold officially for $47.53 in Montreal, the price of which included taxes and retail mark-up.聽 Cigarettes smuggled from the U.S. sold for only $20 to $25.

The degree of smuggling varied across Canada and depended on the provincial taxes on cigarettes, as it does now.聽 Two-third of cigarettes sold in Montreal in 1993 were estimated to be smuggled, one-third in Ontario, a third in British Columbia, and a fifth in the Prairies.聽So, on average, one third of cigarettes sold in Canada in 1993 were estimated to be smuggled.

If anyone advanced the idea that an item, any item, could be sold permanently for one price in one place, and for double that price a short distance from there, they would be immediately told that such an聽arrangement could not聽persist.聽聽These kinds of聽arbitrage opportunities are quickly identified.聽 The Indian reservations in Canada close to the U.S. border were in an ideal situation to聽arbitrage the tax-driven price differentials,聽and聽they quickly got聽into the business.

Even in 1993 governments and the media learned that appeals to Canadian patriotism or to a loss of government revenues - and thus services - did not induce Canadian smokers to obey the law.聽 Canadians were not persuaded to stop buying the smuggled cigarettes with repeated warnings about the detrimental effects of smoking either...

- Article by Professor Reuven Brenner

Read full article: , February 25, 2011