Tobacco Tax Structure and Smuggling

In a noncompetitive environment, a tax increase leads to a higher fraction of sales smuggled under pure ad valorem taxation, but the effect is ambiguous under a purely specific tax. Under a mixed tax regime, a tax rise increases the fraction of sales smuggled when the balance of the two types of taxes leans towards the ad valorem component. In any case, shifting the balance towards the predominant tax component reduces smuggling. The results are of direct relevance to global tobacco control policies and, in particular, to the smoking intervention and tax harmonization policies in the European Union.