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Researchers from the independent non-governmental organization Growford Institute have found that the rapid increase in the excise tax on cigarette production fails to raise tax revenues proportionately, but rather stimulates the development of the illegal market.

This was mentioned by expert Nadiia Novytska at the round table organized by the Growford Institute and the Gorshenin Institute. She is one of the co-authors of the study «Policy improvement in the field of excise taxation of tobacco products and combating their illegal production and circulation in Ukraine.»

«We have developed an econometric model that shows that a 1% increase in cigarette prices raises illegal circulation by 1.22%. That is, a dynamic increase in rates together with low purchasing power stimulates a rise in the illegal cigarette market. By increasing the excise tax, the state does not earn money, but loses it,» Novytska said.

According to her, this conclusion is based on the experience of integration of post-socialist countries into the European Union with its policy of high excise rates on cigarettes. At the time of accession to the European Union, only Cyprus had European taxes, while in Latvia the tax burden was only 25% of the minimum.

Researchers found that the increase in the minimum excise burden to the European level in these countries had not been accompanied by a proportional rise in tax revenues.

«It was accompanied by a significant rise in shadow sales and fiscal losses. In particular, in Bulgaria in 2010 the share of illegal circulation of cigarettes was 30.7% with a rapid increase in rates by 49%. In Estonia in 2009 with the same increase in excise tax the illegal circulation was 21.8%. In Latvia and Lithuania, as the excise burden rose by 52% and 76%, there was an increase in the share of illegal trade in 2010 to 37% and 47%, respectively. Similar trends were in Romania and Hungary,» she said.

In richer countries, this correlation was weaker, so researchers conclude that raising rates should depend on purchasing power.

«Such negative experience allows us to talk about the need for prudent and economically sound approaches to further increase the excise burden. We should not blindly increase excise rates, we must take into account purchasing power, the real situation in Ukraine,» Novytska said.