Simon Chapman’s $10 Cigarette Argument Accidentally Makes the Case for Cutting Tobacco Excise

Simon Chapman’s latest attack on tobacco excise reform is certainly colourful. “Brain farts”, “commercially illiterate”, “drunken sailor”, “fantasists”. But once the rhetoric is stripped away, the economic argument is considerably less convincing.

His central proposition appears to be that because organised criminals can always sell cigarettes more cheaply than the legal market, reducing tobacco excise cannot substantially weaken illicit trade. That simply does not follow. Nobody serious is arguing that reducing excise will magically eliminate organised crime or make legal cigarettes cheaper than the cheapest smuggled product imaginable. The argument is that Australia should reduce the enormous economic incentive sustaining illicit trade while simultaneously making criminal supply more difficult, expensive, and risky.

Ironically, Simon’s own Cambodia example demonstrates just how extraordinary that incentive has become. He points to cigarettes retailing in Cambodia for as little as 34 cents a pack and then constructs a hypothetical scenario in which smugglers might obtain them for 17 cents and land them in Australia for around 30 cents. He calculates that selling two million packs at $10.50 could generate an extraordinary gross return.

Simon presents this as evidence against excise reduction. I see a rather different lesson. If criminals can acquire cigarettes extraordinarily cheaply and enter a country where the legal equivalent costs $40, $50 or even $60, Australia has created an enormous price umbrella beneath which organised crime can operate extremely profitably.

There is also an irony in criticising others for inadequate modelling while using assumptions such as “let’s say perhaps half” the Cambodian retail price and “say 30c” as the Australian landed cost. These figures may be perfectly reasonable for illustrating a hypothetical scenario, but they are still assumptions rather than demonstrated Australian smuggling costs.

Simon then calculates that One Nation’s proposed 75% excise reduction could bring the cheapest legal cigarettes down to approximately $13, while he has found illicit cigarettes online for $10.50.

Think about what that actually means.

We would potentially be moving from a situation where a legal product costing around $38 competes against an illicit product costing $10.50 to one where the legal product costs approximately $13 against $10.50.

Somehow, this is presented as proof that reducing excise cannot work.

I would have thought reducing an illicit product’s price advantage from roughly $27 to $2.50 was economically rather significant.

It doesn’t require every smoker to switch. Some consumers will continue buying illicit cigarettes regardless. Others may willingly pay a modest premium for familiar brands, predictable quality, convenience, and the knowledge that they are purchasing legally. Rohan Pike makes exactly this point in the interview Simon quotes.

Simon dismisses this by pointing to Australia’s cash economy. But the fact that some Australians pay cash to tradies or participate in other parts of the shadow economy doesn’t demonstrate that cigarette consumers are completely insensitive to legality, convenience, product quality, or shrinking price differentials.

More importantly, if criminals respond to cheaper legal cigarettes by lowering their own prices, that isn’t evidence that excise reform has achieved nothing.

It means competitive pressure has forced them to surrender margin.

Simon himself calculates enormous potential criminal returns from illicit cigarettes. If legal competition forces criminal suppliers to cut prices substantially to retain customers while stronger enforcement simultaneously increases their costs, seizures, and probability of prosecution, their expected return declines from both directions.

That is precisely the point.

There is also a fundamental inconsistency running through this argument. Tobacco control has spent decades telling us, correctly, that cigarette prices influence consumer behaviour. Increasing prices discourage consumption, encourage quitting, and deter initiation. Price elasticity is one of the foundations of tobacco taxation.

But apparently, when consumers choose between legal and illicit cigarettes, this elementary economic principle becomes almost irrelevant.

A smoker supposedly responds strongly when the government increases the price of cigarettes from $20 to $30, yet somehow won’t respond meaningfully when the difference between legal and illicit cigarettes falls from perhaps $30 to just a few dollars.

Both propositions cannot simply be asserted without explaining the contradiction.

Simon is absolutely right about one important thing: enforcement is essential. Australia should intercept illicit imports, close illegal retailers, prosecute organised criminals and impose penalties sufficiently severe to change the risk-reward calculation.

But enforcement and excise reform are not competing ideas.

They complement each other.

Excise reform attacks the reward. Enforcement increases the risk.

That is why the serious question isn’t whether Australia can make a legal cigarette cheaper than the cheapest cigarette a criminal syndicate could theoretically manufacture somewhere in the world. It almost certainly cannot.

The serious question is whether Australia can narrow the legal-illegal price differential sufficiently that, when combined with aggressive enforcement, licensing, seizures, closures, and criminal penalties, enough consumers return to the legal market to substantially reduce the profitability and scale of illicit trade.

That is an empirical question. It deserves proper economic modelling and, if implemented, careful evaluation.

There is also something revealing about the language being used. When increasingly prominent politicians, criminologists, former law-enforcement officials and parliamentary inquiries question whether Australia’s extraordinary tobacco excise remains appropriate, dismissing them as “commercially illiterate”, “fantasists” or producers of “brain farts” doesn’t strengthen the counterargument.

It substitutes ridicule for it.

Australia doesn’t have to choose between maintaining today’s excise indefinitely and abolishing tobacco taxation entirely. Nor does acknowledging that excessive taxation can contribute to illicit trade require denying the historical contribution tobacco taxation made to reducing smoking.

Policies can work extraordinarily well for years, eventually reaching a point of diminishing or even counterproductive returns as circumstances change.

That is what policymakers should now be examining.

If Simon is correct that even a dramatic excise reduction combined with substantially stronger enforcement would fail to shift consumers towards the legal market or materially reduce criminal profitability, then rigorous modelling should demonstrate it.

But finding a $10.50 carton price for a carton on the internet doesn’t settle that question.

And neither does calling everyone who asks it economically illiterate.

Perhaps the most curious definition of economic literacy would be insisting that price profoundly influences cigarette purchasing behaviour right up until the moment that acknowledging it becomes inconvenient to your argument.