Taxing Tobacco in the European Union

Tobacco taxes in the European Union are the highest in the world. These taxes are mainly rationalized as a quid pro quo for the social costs of smoking. This paper argues that the arguments are not as persuasive as is often believed. A more likely reason is that governments are addicted to this lucrative and cheap source of revenue. The high taxes involve trade diversion. In the EU, these aspects are overshadowed by the debate on the most appropriate balance between specific and ad valorem taxation. Southern Member States favor the ad valorem rate which tends to protect their cheap, home-grown tobaccos. Northern Member States have a preference for specific taxation which is more favorable to the exchequer, more effective in reducing the level of tobacco consumption, and accords better with the competition objectives of the internal market.

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