More often than not, governments believe that a tax increase will automatically generate more revenue for the budget. While this might be true in specific cases, like property tax where there isn't much room to maneuver, and also in the short term, in the medium and long term, things tend to change—usually in negative ways.
First of all, more money spent on taxes means less money spent in the private sector, or less money saved or invested. This creates an imbalance in the economy, and it's usually the private sector that takes the hit (since a baker cannot force you to buy their bread, but the government can force you to pay more tax).
This basic lesson from Economics 101 is now being learned the hard way by the Dutch government in relation to cigarette taxes. For several years now, the government has been pushing a holy crusade of "no-smoking-allowed-in-this-country-anymore." Just three years ago, we had news like this:
"Cigarettes must cost €60 per packet before addicted smokers will quit"
Currently, a pack of cigarettes doesn't cost €60 yet (it's roughly over €11), but the effects are already being felt:
"The sharp increase in the price of cigarettes is leading to a drop in tax income for the treasury, as more people stop smoking or buy their tobacco products over the border, RTL reported on Tuesday."
"According to finance ministry figures, tobacco sales fell 40% in June and were 30% down in July and August. That is so high that the total amount raised in taxes is below government forecasts, RTL said."
“If you look at the figures… you can see the government’s forecast of a €400 million increase in taxes threatens to become a loss of €100 million,” tobacco retail group NSO said. In total, this could hit the new government’s spending plans by almost €500 million.
So, not only did the tax increase fail to bring more money into the budget, but it actually resulted in a loss. How surprising!
Why is this happening? There are various reasons as shown above: some smokers have quit (which should please the government in terms of their plans to make every smoker give up their bad habits—but it's not, since it's costing them revenue).
Another, more serious reason is that Germany and Belgium are nearby, so many cigarettes are now being purchased outside the Netherlands, and the black market is growing significantly. This is now clearly recognized:
"RSO figures suggest some 35% of tobacco products used in the Netherlands were not bought here"
"In July customs officials seized six million cigarettes and 4.5 tonnes of rolling tobacco during checks at Rotterdam port"
The solution:
“If that is the case, we have to reverse the tax increase,” said BBB parliamentarian Henk Vermeer.
But that’s nonsense—we all know that taxes are good for you. Don’t cut any taxes; just grab the missing money from somewhere else! For example, increase the tax on alcohol. That’ll teach them a lesson, right?!
