Black Markets and Incentives

From EPJ:

The Big Apple Black Market Blows a Big Hole in a New York Tax
NyPo reports on New York’s crazed taxes on cigarettes:

It doesn’t take much coaxing to get otherwise legitimate Big Apple businesses into the illegal cigarette trade.

“They come out here like they are salesman from Pepsi or the potato-chip company,” said the owner of a north Bronx bodega that sells smuggled Newports and Marlboros for $8 a pack.

“I don’t know how the city is going to stop it. The city is losing a lot of tax money,” he said. “They are killing themselves, because no one is paying $12 for a pack of cigarettes, and I’m not paying taxes on the money I make selling them.”

His supplier provides him with cartons between $45 and $50 a pop, which gives him a $30- to $35-per-carton profit.

Despite the risks, individual entrepreneurs are also getting into the act.

“I needed a second job, and since I couldn’t find one, I decided to sell cigarettes,” said Gregg, a 30-year-old who sells cigarettes out of his backpack for $8 a pack in Midtown. “So far, I’m making a good profit. Sometimes I make $160 a day.”

Greg said he simply drives to Delaware, where he can get a carton for $27, and loads up his trunk.

Call it the Delaware Curve, and consider it a corollary to the Laffer Curve. There is a point at which if a state raise taxes on an item significantly higher than neighboring states, the state will actually experience declining tax revenue from the item taxed, as black market entrepreneurs will start operating and smuggle the item from the lower tax state to the higher tax state and sell the item tax free on the black market in the higher tax state.


3 responses to “Black Markets and Incentives

  1. Sounds like a page right out of Samuel Konkin’s book.

  2. Yes. The “black market” is simply individuals engaging in mutually voluntary activities that some other folks don’t approve of. These other folks aim to force their opinions on everybody else.

  3. I have to wonder if any politician is actually intelligent. This also sounds like what happened in Canada a few years ago. They raised the taxes on cigarettes prohibitively and, within one year, there was a one billion dollar illegal cigarette market . . . from housewives and mom and pop stores to organized criminal gangs. A prohibitive tax becomes a prohibition becomes a black market and, eventually, violence will result as the more ruthless and greedy try to control the illegal market.