We are all familiar with the Laffer Curve, the insistence that there is a tax rate - dependent upon the tax, the structure of the society and so on - which maximises tax revenue. Other rates, either higher or lower, gain less yield. When put like that the observation is unarguable. It’s only when the insistence is that we’re above that rate is made that the arguments start. We can have analogues of this, perhaps the Scully Curve which gives us the growth maximising tax rate. Going wider, the Tabarrok Curve for patent strength and innovation rates.
Or, as we think we’re coining today, the Snowdon Curve. As Chris Snowdon of the IEA notes:
New data from Australia, which pioneered plain packaging and has the highest cigarette taxes in the world and has always banned nicotine vapes, shows that youth smoking has increased six-fold since 2019.
There is an optimal amount of regulation, taxation, meant to discourage an activity. Going further than this actually increases the amount of the undesired activity, not decreases it.
If, for example, spirits were taxed so highly that it was near impossible to afford them then how much would home distillation rise? It’s possible to think by more than the drinking discouraged. We do not insist on that particular example, it is just an example.
But here with smoking the thing that everyone wants to discourage most is the teen smoking of cigarettes. On the logical grounds that it is addictive, those who become addicted are likely to shorten their lives as a result and yes, probably the world would be a better place without such. But that doesn’t mean that really strict regulation and really high taxation actually achieve that goal.
We are, after all, dealing with human beings. Who do have a propensity to lying, cheating, tax dodging, if they think the impositions of the killjoys and anal retentives are too high to be bourne. Prohibition did not stop booze consumption after all. High brandy taxes in the past just led to Poldark.
Australia, as the news keeps reminding us, does have a large illegal tobacco sector. The taxes, the restrictions, are worth people working in and supplying it - which leads to the real price of smokes and baccy to be considerably lower - thus consumption higher, than the legal status would suggest.
There really is a curve here. Restrictions can be so onerous that the society simply declares “Bugrit, millennium hand an' shrimp” as with this example of teen smoking and Australian tobacco restrictions.
It’s possible to generalise this further too. Some of us have lived in societies where everything is so tediously regulated that no one bothers to obey any of the laws. This explains the Soviet economy and Italian driving.
There really is this Snowdon Curve, it is possible to have non-optimal levels of tax and regulation which end up increasing the amount of the undesired activity. As with the base Laffer contention, this is unarguable. That we are now beyond this point in many aspects of society, well, let the arguments begin.