Do Cigarette Taxes Finance Terrorism?
I'm going to start at the beginning. Merchants price a good based on several factors: the raw materials in the product, the difficulty of obtaining the product, the supply of the good locally versus the number of other merchants selling the good versus the consumer good demand for the good, and any relevant taxes. Taxes are the only truly arbitrary part of the price. It is also the only part of the price that is a constant for all merchants.
Well, all merchants that follow the law. Any merchant that is willing to break the law can sell a product for less than the competition is charging. If the difference between the untaxed price and the taxed price is great enough, merchants and buyers will form a "black market" to buy and sell products free from all government interference.
How does this tie into cigarettes and terrorism? As you may have noticed, many states have begun to impose punishing cigarette taxes. Rates vary from $3 in New York City ($1.50 in New York state) to a mere $0.07 per pack in South Carolina. 21 states charge $1.00 or more -- per pack -- in cigarette taxes. These high taxes provide a large incentive for buyers and sellers to skirt the law and buy cheaper "duty-free" cigarettes.
Organized crime has been quick to notice this and provide a ready source of smuggled cigarettes. In a post at the Belmont Club yesterday, Wretchard connects the dots between cigarette taxes and terrorism.
Why are cigarettes such an attractive commodity for organized crime groups? First, the difference between the duty-free and duty-paid prices are substantial, thereby allowing smugglers to make profits at relatively low street prices. Second, they are very easy to handle and transport. For example, a container load of cigarettes carries a potential tax value of $1.2 million, almost all of which is potential profit for the smuggler. Third, cigarette smuggling requires a willing market and a good local distribution network, which have already been established by drug-trafficking organizations.
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In Colombia, cigarette smuggling is directly related to money laundering schemes through the so-called "black market peso exchange." During the exchange, drug-dealers convert U.S. dollars into clean pesos, while cigarette smugglers buy U.S. dollars in order to purchase international goods. The U.S. Treasury Department calls this system "the most dangerous and damaging form of money laundering ever encountered"
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Tobacco smuggling is a ruthlessly efficient and highly organized trade which involves some of Britain's most vicious criminal gangs, as well as the Eastern European crime groups and the Italian Mafia. British police estimate that Italian organized criminal groups account for 15% of the illegal trade, while Eastern European gangs are responsible for 10% of the smuggled cigarettes in Great Britain. The ferocity of the competition is likely to contribute to violent confrontations as the gangs compete for control.
Wretchard notes that Interpol was establishing a link between terrorists and smugglers before the attack on the World Trade Center.
Structural links between political terrorism and traditional criminal activity, such as drugs trafficking, armed robbery or extortion have come increasingly to the attention of law enforcement authorities, security agencies and political decision makers. There is a fairly accepted view in the international community that in recent years, direct state sponsorship has declined, therefore terrorists increasingly have to resort to other means of financing, including criminal activities, in order to raise funds. These activities have traditionally been drug trafficking, extortion/collection of "revolutionary taxes", armed robbery, and kidnappings.
Maybe it's time that we struck a blow against terrorism. Let's end the "War on Drugs" and drastically cut cigarette taxes. By taking a lot of the profit out of smuggling we can dramatically cut funding to terrorist organizations.
It would certainly be an innovative approach.