Taxes and Smuggling

A fundamental principle of economics is that incentives matter. They do so because when forming their preferences people take into account their circumstances. That is why government intervention in the economy so often breeds what is often referred to as the underground economy. When supplying goods legally becomes more expensive due to taxes or regulation, the incentive to skirt the law so as to supply them more affordably is very powerful. For many the temptation is too great to resist.

An excellent illustration of this principle is the consequences of this summer's New York City cigarette tax hike. FoxBusiness reports that, "Sales of taxed cigarettes plummeted 27 percent since July, when state lawmakers raised the excise tax to $4.35 a pack on top of the city's tax of $1.50, making the average price of Marlboros in New York $11.60, with some shops charging as much as $14."

Now comes a story from the New York Post (HT: LewRockwell.com and Economic Policy Watch) reporting that several people are willing to risk being run in by the cops to sell illicit cigarettes--those not bearing a tax stamp--in Gotham. One underground entrepreneur drives to Delaware to pay $27 a carton and is able to make up to $160 a day by selling them for $8 a pack in Midtown NYC.