Few topics attract as many myths and misconceptions as smuggling. As an activity that is more frequently encountered through tabloids and crime dramas than academic research, public perceptions are often dramatised and outdated. At the same time, how we think about smuggling influences how we think about a range of public policy issues. This includes taxation. It is therefore worth looking at some of the myths that surround the relationship between smuggling and taxes to consider what research can tell us about them, and how this interplay impacts policy making.
I focus here on three particularly relevant myths. I draw both on work that the ICTD has done on these topics in recent years, and on my book, “Smugglers and States”, published earlier this year, which examines the deals and arrangements that regulate smuggling in North Africa, and asks what they mean for the region’s politics and development.
Myth 1: Lower taxes mean less smuggling.
Why are goods smuggled? For some goods, smuggling is driven by the scarcity of legal trade routes– this is the case for cannabis, for example, or endangered wildlife products. But most smuggled goods are ones that can also be traded legally such as oil, rice, or cigarettes. Here, the common assumption is that price is a key driver of smuggling. Consequently, the argument has often been made that raising taxes will lead to an increase in smuggling. While this correlation seems intuitive, as taxes raise prices, it is however far from a general rule. Research on smuggling has shown that pricing is just one of the many factors that determine how much of a certain good is being smuggled. Border control policies, track and trace systems, the structure of smuggling networks, global supply chains, market structures and demand levels all alter this equation. In other words, while higher taxes can lead to an increase in smuggling, a whole range of factors can nullify that effect. In fact, when higher taxes are accompanied by different border control policies, decreasing consumer demand, a change in the structure of smuggling networks or in the informal arrangements between states and smugglers, they can go hand in hand with a decline in smuggling. Let’s look at an example.
This myth is particularly important in the context of cigarettes as tobacco companies have heavily promoted the narrative that higher taxes will aggravate smuggling. In reality, there is substantial evidence to contradict these claims. Recently, an ICTD research project evaluated the effects of a tobacco tax increase on smuggling in Sierra Leone. Despite a new excise tax worth 30 percent of the retail price – and even despite relatively limited border control capacities, the amount of cigarette smuggling in Sierra Leone didn’t surge. It actually went down, while bringing in substantial tax revenues. Here too, the structure of the smuggling network meant that price was not the decisive factor – notably, the overall demand for cigarettes had already dropped, and was likely exacerbated by the tax rise. This finding should encourage other countries in the region currently considering higher tobacco taxes especially as many African countries are still taxing cigarettes far below the recommended WHO levels. There is a plethora of other evidence suggesting that tobacco taxes are an extremely effective policy to regulate public health and raise revenues – even in the presence of smuggling economies.
Myth 2: Smugglers don’t pay taxes.
We commonly assume that smugglers operate far away from the watchful eye of the state –underground, at night, in the shadows. Consequently, a common misconception is that smugglers do not pay any taxes. Perhaps most surprisingly of any other myth on this list, this is not necessarily true.
First, our common conceptions dramatically underestimate the amount of smuggling that happens at legal entry points. Smugglers are not just crossing desert borders at night or hiding contraband in the seat cushions of cars. A substantial amount of smuggling occurs through ports and airports – often by legal importers, who pay taxes and tariffs on some of their wares, but not on all of them. In some contexts, this can provide key competitive advantages for firms connected to political and economic elites. The key enabler here is not necessarily states’ inability to detect smugglers’ wares, but the relationships at ports and customs from which smugglers benefit.
Second, even if smugglers do not pay all taxes and tariffs when they cross borders, many still make a variety of formal and informal payments through their journey. This may include payments to customs officials or at various roadblocks or checkpoints erected by the police, national guards, or armed groups near the borders. It may also include payments to the municipalities that tax the markets in which smuggled goods are sold. As Vanessa van den Boogaard, Wilson Prichard, Samuel Jibao and many others have highlighted, these dynamics can be highly normalised and routinised – they are ‘priced in’ by smugglers and state agents alike. This leads directly to the third myth:
Myth 3: It’s all about state capacity
The default assumption about the relationship between smugglers and states depicts a dynamic of ‘cat and mouse’ whereby states are always on the hunt for smugglers while the latter are trying to avoid being caught. The determining factor in this game is states’ capacity. Based on this logic, investing more money in tools and infrastructure that help fortify states’ border control will result in less smuggling. This rationale has substantial consequences. Indeed, the number of border walls and fences around the globe has quadrupled since the early 2000s, and investments in border scanners, training and night vision equipment have become common elements of development cooperation packages.
But research on smuggling, including my recent book on “Smugglers and States”, has highlighted that the ‘cat and mouse’ metaphor is often misleading. In many cases, especially when it comes to the smuggling of consumer goods, state agents are well aware of what is being smuggled and by whom. In fact, smuggling is commonly tolerated and even regulated by states. This happens for a wide variety of reasons including petty corruption or the interference of political elites benefitting from smuggling economies. More frequently, border communities are economically marginalised and heavily reliant on informal trade to create jobs and incomes. In these cases, policy makers may prefer to tolerate smuggling economies rather than provide sustainable economic alternatives, which explains why increasing state capacity alone is not enough.
In order to understand how new policies, technologies and infrastructure will actually affect smuggling, we need to study a wider set of factors – the politics and relationships in which these activities are embedded, the pressures that street-level bureaucrats are under, and the social expectations of affected communities. This comprehensive approach to studying smuggling presents a final parallel with taxation. Here too while there is often a temptation to focus on capacity, tools and technology at the expense of tracing the informal practices and logics that they are embedded in, research would particularly benefit from a detailed understanding of political and social contexts – and a weariness of common myths.
