The Stake That Missed the Heart
Simon Chapman’s latest blog claims to put a “stake through the heart” of the argument that high tobacco taxes are driving Australia’s booming illicit cigarette market. But when you strip away the rhetoric, it looks more like an attempt to dismiss a growing number of experts who say the opposite.
Chapman argues that cutting the tobacco tax wouldn’t reduce the black market because criminals can buy cigarettes from manufacturers very cheaply. But that actually highlights the real issue. What matters is the price gap between legal and illegal cigarettes.
In Australia, legal packs can cost $40 to $60. Meanwhile, illicit packs are commonly sold for $7 to $10. That enormous difference creates a huge incentive for criminals to supply the market and for smokers to buy from them.
Australia has effectively created one of the biggest price gaps between legal and illegal cigarettes anywhere in the world. That gap is not a side issue. It’s the engine driving the black market.
Chapman tries to undermine critics by pointing to an extreme suggestion that the tobacco tax could theoretically be eliminated. But that’s largely a distraction. The real argument, made by experts like James Martin, is that Australia’s taxes have been pushed so high that they have created a massive opportunity for organised crime.
Martin and other criminologists simply point out a basic economic reality: when the profits are huge, criminal supply follows. That’s not controversial. It’s how black markets work.
Chapman also assumes that illegal sellers would always keep prices far below legal cigarettes, even if taxes were reduced. But history shows that when the price gap between legal and illegal products shrinks, black markets often shrink as well. When the profits fall, the risks of running an illegal operation become less attractive.
Another strange part of Chapman’s argument is his attempt to blame the illicit cigarette boom on weak enforcement of illegal vape shops. But the timeline tells a different story. Australia has spent the last decade pushing cigarette taxes higher and higher, making them the most expensive in the world. As the legal price climbed, the profit opportunity for smugglers grew larger.
Chapman is right that enforcement has often been weak and poorly coordinated. But enforcement alone can’t solve a problem when the financial rewards are enormous. If a product can be bought for cents and sold for ten dollars in a country where the legal version costs fifty, criminals will move in.
What’s surprising about Chapman’s argument is that he spends more time dismissing critics than engaging with the economic logic behind their concerns. By labelling people part of a “lower the tax lobby,” he avoids dealing with the core point being made by researchers who actually study illicit markets.
Australia’s illicit tobacco problem didn’t appear out of nowhere. It grew out of a mix of policy decisions, weak enforcement and huge profit incentives created by extremely high taxes.
Calling the debate settled doesn’t change the reality on the ground. When $7 illicit packs are being sold openly across Australia while legal packs cost five or six times as much, it becomes harder and harder to pretend that price has nothing to do with the problem.
The principle that price and consumption are inversely related is basic to microeconomics. When price increases consumption falls and vice versa. Several other options are also available for smokers apart from reducing consumption by smoking less or quitting altogether. One is moving from a premium to a discount brand. Another is moving from legal to illegal cigarettes. In addition, smokers can and do move to nicotine vapes. It is a pity that Simon cannot accept the fact that the exorbitant pricing of cigarettes he campaigned for so strongly has become a train wreck.
Simple tax arbitrage. Basic market economics.
One of the side benefits of studying illicit markets is that you get a real time demonstration of undiluted market forces. You see what happens when incentives are left to run without friction. And the Australian illicit tobacco market is exactly that - a live case study in price gap economics.
The problem with Chapman’s argument is that it treats the black market as if it’s immune to the fundamentals that govern every other illicit economy. It isn’t. When the legal product is $40–$60 and the illegal product is $7–$10, the gap is the market. That’s not ideology. That’s not lobbying. That’s just how arbitrage works.
Calling people “lower the tax lobby” is a rhetorical dodge. It avoids engaging with the basic economic reality that criminologists, enforcement agencies and market analysts have been pointing out for years.
When the profit margin is enormous, supply will always find a way in.
You don’t need to “control a factory” to exploit a price gap. You don’t need to “vertically integrate” anything. You just need a product that costs cents to make and sells for dollars in a high tax jurisdiction. The rest of the system - the smugglers, the wholesalers, the retailers - builds itself around that gap.
Australia created one of the biggest price differentials in the world. The illicit market filled it. That’s not a moral argument. It’s not a political argument. It’s not even a criminological argument.
It’s just economics.