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Excessive taxes, generally by diminishing the consumption of the taxed commodities, and generally by encouraging smuggling, ceaselessly afford a smaller income to authorities than what is perhaps drawn from extra average taxes.
From Adam Smith, The Wealth of Nations.
Discover that there are two “leakages” because of the excessive tax. The primary is solely a transfer up the demand curve for the taxed merchandise. The second is a discount within the amount bought legally.
After I gave my latest OLLI discuss on The Wealth of Nations, I famous that there seemed to be such a case in Canada within the early Nineties. I seen it on the time and located the next, from testimony by a GAO official earlier than a Home subcommittee:
In line with the Canadian authorities, sharp will increase in Canadian federal and provincial cigarette taxes within the late Eighties and early Nineties led to large-scale smuggling between the USA and Canada carried out nearly fully by organized crime. Violence elevated, retailers suffered, and in a single yr alone, Canada and its provinces misplaced over $2 billion (in Canadian {dollars}) in tax revenues. Canada responded in 1994 by sharply decreasing federal and provincial cigarette taxes and rising its enforcement efforts, amongst different steps. Since then, smuggling has declined significantly.
In his testimony, the official identified that from 1984 to 1993, Canada’s federal cigarette taxes rose from 42 cents per pack to $1.93; Ontario’s rose from 63 cents to $1.66; and Quebec’s rose from 46 cents to $1.78. These two provinces alone accounted for nicely over 50 %, and near 60 %, of Canada’s inhabitants. The results of all these tax will increase was that the value of a pack rose from $2.64 in 1984 to $5.65 in 1993, all in 1994 {dollars}.
How did the unlawful move happen? The official said:
Throughout most of this era, cigarettes made in Canada have been exported tax-free to the USA. Organized prison teams bought Canadian cigarettes that had been exported to the USA and smuggled them again into Canada. This resulted in additional than an 11-fold enhance in United States cigarette imports from Canada from 1990 to 1993 (see fig. 1). The 1994 examine discovered that an Indian reserve that straddles the U.S.-Canadian border between Cornwall, Ontario, and Massena, New York, had change into the first conduit for smuggling cigarettes into Canada.
I had grown up in Canada pondering of us Canadians as comparatively law-abiding and I believe that was true. However change the incentives, and habits adjustments. Adam Smith wouldn’t have been shocked.
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