To what extent do excise taxes affect Malawi’s cigarette trade gap with Kenya and South Africa?

Abstract

Background: While economic theory supports the perception that cigarette taxes incentivise producers and users to identify ways of evading the tax, leading to the smuggling of cigarettes through a profit-maximising mechanism, empirical evidence has produced mixed findings. Aim: This study bridges the knowledge gap and contributes to the debate by evaluating the impact of the taxation of cigarettes on cigarette smuggling and assessing the correlates of cigarette smuggling. Setting: In the study Malawi’s cigarette imports from Kenya and South Africa from 2007 to 2016 are examined. Method: Quintile regression and correlation analysis. Results: Empirical results show that increased excise taxes are not associated with increased smuggling as measured by the trade gap. Using the correlation analysis, the study found that an increase in the bilateral exchange rate and corruption in the partner countries are associated with an increase in the smuggling of cigarettes into Malawi. Conclusion: Results tally with several empirical studies while conflicting with others. On the policy implications, the results suggest that tackling cigarette smuggling, using taxes only, may not be sufficient. To be effective, combating smuggling must also include combating corruption, strengthening the rule of law and imposing punitive excise taxes on cigarettes. Contribution: This article contributes to the debate on the impact of cigarette taxes on smuggling of cigarettes using Malawi’s trade data. Interestingly, increased excise taxes on cigarettes were not associated with increased cigarette smuggling. The findings provide valuable insights for policymakers on the complexities of cigarette smuggling and the need to consider a range of factors, such as strengthening the rule of law, to combat cigarette smuggling.

Keywords

• excise taxes
• trade gap
• cigarette smuggling
• trade openness
• corruption
• rule of law
• tax evasion