Friday, 24 February 2017

Tobacco tax evasion - what's the story now?

I have written before about the sketchy guesswork used by the government to estimate the size of the illicit tobacco market. HMRC's current methodology is to...

... estimate how many smokers there are and multiply it by the estimate of how many cigarettes they each smoke. They then subtract the number of recorded sales - plus an estimate of how much is bought legally abroad - from the total and the figure that emerges is the amount of non-duty paid tobacco.

I have suggested that the decline in legal tobacco sales since 2009/10 - when tobacco taxes began to rise well above inflation - has been far greater than the decline in smoking prevalence would predict. In 2009/10, 49 billion cigarettes were sold. By 2014/15, this had fallen to 33 billion, meaning that sales had fallen by a third. Sales of hand-rolling tobacco, meanwhile, had remained the same at around 6.6 million kilograms. The graphs below show legal sales of cigarettes and other tobacco (mainly hand-rolling tobacco) since 1992. Note the big dip in 2000 when cross-border shopping from the EU began in earnest.

Over this period, the smoking rate has fallen by just 10 per cent (or two percentage points), from 21 per cent to 19 per cent, and half of that drop has taken place since 2010. Since 2010, the smoking rate has fallen by just five per cent but cigarette sales have fallen by more than a quarter. Moreover, the population has grown by four per cent.

It is possible that this can be explained by smokers sharply cutting down their consumption (perhaps because of e-cigarettes), but it is also possible that higher prices have pushed more people into the illicit market.

Or it could be a bit of both. Unfortunately, the HMRC estimates are so rough and ready that it is impossible to tell. Last time I wrote about this, HMRC figures showed a rise in the illicit market share since 2011/12 (from 7 per cent to 10 per cent in 2014/15), but no real change since 2009/10 when the estimate was 11 per cent.

It should be noted that any figure between 4 per cent and 12 per cent is possible in any of these years. Look at the confidence intervals. This is a broad guesstimate that depends on a lot of assumptions.

The importance of assumptions can be illustrated by looking at the most recent HMRC estimates which use an updated methodology. All the figures have suddenly changed. Whereas HMRC previously found no change between 2013/14 and 2014/15, they now find a four percentage point decline - from 11 per cent to 7 per cent - followed by a near-doubling of the rate, from 7 per cent to 13 per cent.

HMRC say that their new methodology takes into account evidence about people who 'falsely deny they smoke'. Rightly so, but estimating how many smokers claim to be non-smokers also involves a large element of conjecture. Does the new methodology get us any nearer the truth? It is hard to say. What is clear is that the figures are highly sensitive to changes in assumptions.

HMRC add their estimate of the illicit market to the legal sales data and conclude that the total number of cigarettes sold in Britain (legal and illegal combined) has fallen from 56 billion in 2009/10 to 38.5 billion. This is a drop of nearly a third (31 per cent) in a period when smoking prevalence has declined by just ten per cent and the population has grown by four per cent. And so the puzzle remains.

A reduction in the number of cigarettes smoked per person offers a partial explanation. The ONS says that average daily cigarette consumption in England fell by two percentage points between 2009 and 2012 (from 14 to 12 for men and from 13 to 11 for women). Its most recent dataset shows a figure of 11 per day (both sexes combined). This suggests an overall decline in cigarette-per-smoker consumption of 18.5 per cent since 2009.

This is a substantial drop but not enough to explain the overall decline in (legal) sales. There were 49 billion cigarettes sold legally in 2009/10. Reducing this by 10 per cent to account for the decline in smoking prevalence takes it down to 44.1 billion.

Reducing that 44.1 billion by 18.5 per cent to take into account lower consumption by smokers gives us 36 billion.

Increasing that 36 billion by four per cent to take into account population growth gives us 37.4 billion.

But HMRC records legal sales of 31 billion in 2015/16.* HMRC reckon that a further 1.5 billion cigarettes were brought in from the EU legally. This takes our 37.4 billion down to 35.9 billion, so we are still five billion cigarettes short of what we might expect, but this could be partially explained by a shift to rolling tobacco. Despite the decline in smoking prevalence, sales of hand-rolling tobacco remain the same as they were in 2009/10.

This is a rough and ready calculation, but it suggests that HMRC's estimate that the illicit trade makes up between 8 per cent and 17 per cent of the cigarette market can be justified, although the real figure seems closer to the high end than the low end. HMRC's mid-point estimate of 7 per cent for the previous year certainly looks implausibly low.

Even if HMRC's mid-point estimate of 13 per cent is correct, the number of illegal cigarettes on the UK market is mind-boggling. It suggests that six billion cigarettes were sold on the black market in 2015/16, along with ten million kilograms of rolling tobacco. That's in addition to 1.5 billion cigarettes and 3.2 million kilograms of rolling tobacco that avoid UK duty by being brought in legally from the EU.

And, to repeat, HMRC's estimates are incredibly sensitive to changes in assumptions. For example, if the average smoker consumes 11.5 cigarettes a day, as opposed to 11.0 cigarettes as assumed above, it leaves another 1.5 billion cigarettes unaccounted for.

We are talking about a serious problem for the government and yet there does not seem to be any serious effort being made to establish the facts. For a relatively small outlay, the government could conduct empty pack surveys and get a better idea of what is going on. Unfortunately, there are perverse incentives at work because some people would rather live in darkness than light a candle. The customs agencies want to be seen to have got a grip on tobacco smuggling and the government (along with anti-smoking groups) wants to believe that it can raise taxes without fueling the black market.

Three things are clear, however. Firstly, that tobacco taxes hit the top of the Laffer Curve in 2012/13 when £9,681 million was raised. Revenues have fallen every year since and stood at £9,485 million in 2015/16, despite higher rates of duty.

Secondly, that whichever methodology is used, the illicit cigarette market has grown in recent years as a share of the overall market. The 13 per cent mid-point estimate in the most recent dataset is higher than it has been for a long time.

Thirdly, that there are reasons to think that even 13 per cent could be a significant under-estimate, but until efforts are made to measure the illicit market properly, no one will know for sure.

* The tobacco tax gap documents says 32 billion, but the tobacco bulletin says 31 billion (30,974 million, to be precise).

Thursday, 23 February 2017

A beer a day keeps the doctor away

You may have read this (now deleted) story at the Telegraph yesterday:

Just half a pint of beer a week increases risk of heart disease - new study

It is the sheerest of bollocks. A perfect storm of incompetence, credulity and incomprehension. I wrote about it for Spectator Health. Do have a read.

Friday, 17 February 2017

Rational alcohol taxation

This week I proposed replacing Britain's perverse system of alcohol duty with a flat tax on units of alcohol. A 9p/unit tax would pay for all the external costs of drinking to the government and would change the tax rates on a range of drinks as follows:

As you can see most - but not all - drinks would become cheaper. This is because drinkers are grossly over-taxed at present (ie. the tax revenue greatly exceeds the costs to public services). Cider, by contrast, is somewhat under-taxed.

You can read the short briefing paper here.

I also wrote about it for the Telegraph...

A new briefing paper from the Institute of Economic Affairs shows what a fair system would look like. British drinkers currently consume approximately 50 billion units of alcohol a year. To recover the £4.6 billion in costs, there should be a flat rate of tax of 9p on every unit of alcohol sold. That would mean a higher tax on some strong ciders and a lower tax on other drinks. Overall, it would mean lower taxes, but even after this reform most of our drinks would still be more expensive than the European average. In the EU-27, the average duty on a pint of lager is 14p (we currently pay 52p) and the average tax on a bottle of wine is 44p (we currently pay £2.08).

This is not the first time the idea of taxing alcohol by the unit has been suggested. Economic think tanks and temperance groups alike have called for the same thing. In 2011, the Institute for Fiscal Studies concluded that "it would seem desirable to treat different types of alcohol in the same way in the tax system" and, in 2016, the Alcohol Health Alliance called on the government to lobby the EU so that "drinks in all categories can be taxed according to their strength". This raises the salient point that EU regulation currently prohibits a sensible system of per-unit alcohol taxation. As luck would have it, this will not be an obstacle for long.

Do have a read.

Thursday, 16 February 2017

People believe poverty has increased because they are misinformed

The usually sensible John Rentoul has produced a very special sentence for the Independent...

So the solution to the puzzle is that, objectively, poverty hasn’t increased, but that people feel it has, which means that, in a way, it has. 

This could be read as the final, feeble pistol shot of the left after years spent predicting an epidemic of poverty due to 'austerity'/the Tories/the bankers that never appeared. In one line, Rentoul seems to have crystallised the left's preference for emotions over facts.

That is unfair, however. Badly worded though it is, Rentoul is making a point that is merely wrong, rather than insane.

It is a reference to the latest version of the Joseph Rowntree Foundation's Minimum Income Standard (MIS) which was published yesterday. JRF claims that 19 million people subsist on an inadequate income and are either in poverty or are 'at risk of poverty'. This is a rise of 4 million since 2008/09.

The MIS is based on what people in focus groups say they need to have an adequate standard of living. This is obviously subjective and, in practice, it is closer to an average standard of living than an 'adequate' one.

For example, here are some of the clothes that a mother of two needs to buy for herself (new) every single year in order to avoid being 'at risk of poverty', according to the MIS:

5 vest tops
4 pairs of jeans
4 jumpers
4 pairs of leggings
1 pair of jogging bottoms
2 summer skirts
2 winter skirts
5 smart tops
2 summer dresses
1 hat
1 scarf
1 pair of gloves
1 swimming costume
1 night dress
1 pair of pyjamas
1 pair of slippers
1 pair of flipflops
1 pair of flat boots
1 pair of heeled boots
1 pair of trainers
1 pair of court shoes

There are other items on the list that need to be bought more or less frequently, but that gives you a illustration. I'm not suggesting that this kind of annual wardrobe change is unusual for a woman, nor am I suggesting that you have to be rich to afford it. But to claim that you need to replace all this stuff every twelve months in order to have an 'adequate standard of living' is a bit of a stretch, in my view. And yet if you can't afford this, you are on the 'brink of poverty', according to the Independent.

I've written about the MIS before and was on the radio talking about it yesterday, so I won't go on about it here. Suffice to say, I don't think it measures poverty. The Joseph Rowntree Foundation also doesn't think it measures poverty and they are happy to confirm this when asked. But they can't stop the likes of The Guardian referring to the MIS as the 'poverty line' and I don't suppose they lose much sleep over people misrepresenting it as such.

Rentoul also interprets the MIS as a poverty line and he cites their figures as evidence that poverty has sort of got worse even though all the official evidence shows the opposite. For instance, here is the Office for National Statistics data showing income growth since 2007/08 (adjusted for inflation). Incomes have grown by 13 per cent in the bottom fifth. Only the richest fifth has seen a decline.

Since the strongest income growth has been in the poorest two fifths, it is hard to believe that four million people have been pushed into poverty an inadequate standard of living. JRF say this is because the cost of their basket of goods has risen by more than the RPI and CPI measures of inflation. I have no way of checking this but it would be surprising if the MIS basket was so dramatically different to the general basket of goods used by the government. It seems to be a partial explanation, at best.

Another explanation is that the JRF report stops at 2014/15 and thereby ignores the sharp rise in incomes seen in 2015/16. It is a shame they didn't wait a bit longer so they could get a more up to date picture (the new figures were published by the ONS last month).

In any case, if I am forced to choose between inflation-adjusted income data from the ONS and a dubious measure of not-really-poverty from JRF, I'm going to stick with the ONS. We know that unemployment is almost at a 40 year low, incomes are at an all-time high and wages grew by 2.6 per cent last year. Relative and absolute poverty are both lower than they were in 2008.

In other words, there is very little supporting evidence for JRF's claims except - as Rentoul points out - people's intuition. Accepting all the ONS evidence, Rentoul asks the question:

So why do people feel that poverty and inequality have become worse?   

In Rentoul's mind, the MIS holds the answer. People are getting wealthier but our definition of poverty keeps changing...

It would seem that the income most people think is needed for an acceptable life has risen faster than incomes generally. So we would now think of someone as “poor” if they cannot afford, say, a dishwasher, when we wouldn’t have thought that was necessary in the 1980s. 

This is true over the long-term, but I don't think the MIS has become conspicuously more generous since 2008/09. Even if it has, I don't think this explains the common belief that there is an epidemic of poverty and inequality.

I think there is a simpler explanation. Since at least 2008, the middle class left - as epitomised by The Guardian and Independent - has been asserting that poverty (a) is getting worse, and (b) will get even worse very soon. At first this was because of the recession - a plausible supposition but one that, broadly speaking, turned out to be false. Then it was because of cuts to public services under the umbrella of 'austerity'. Then it was because of welfare reform. And now it is because of Brexit.

They have been wrong every time for reasons I discussed in this post. There has been no audit of previous failed predictions and it has been remarkably difficult to get the basic facts in front of the public. The people Rentoul is addressing don't 'feel' that poverty has got worse in the sense that they, personally, have been plunged into poverty. They believe poverty has got worse because that has been the implicit or explicit message of the Independent for years.

They are simply misinformed - and they are happy to be misinformed because it suits their view of how the world works. That is why they cling to any crumb of evidence from the Joseph Rowntree Foundation or the Institute for Fiscal Studies while ignoring the Office for National Statistics. They are just wrong. No other explanation is required. People are wrong about all sorts of things and the belief in immiseration is just one of them.

Tuesday, 14 February 2017

The smoking ban miracle hoax

Jacob Grier has written an excellent article for Slate about the junk science used to justify smoking bans. In particular, he looks at the ludicrous heart attack miracles than supposedly take place whenever people are prevented from smoking in pubs.

When studies sampling larger populations finally appeared, the reported declines in heart attacks began to shrink. A study of the Piedmont region of Italy found a much lower decline of 11 percent, though curiously only for residents under 60 years of age. England, which implemented a smoking ban nationwide, presented the first opportunity to study the matter on a national scale. Researchers there credited the ban with a heart attack reduction of just over 2 percent nationwide.

Critics noted that the rate of heart attacks in England had also been falling in the years prior to the ban and that the reason for the decline was still not clear. Regardless, the data there made it obvious that the miraculous reductions claimed in smaller studies were unrealistically high. Even so, despite acknowledging the wide variation in findings and the admitted methodological limitations of the studies, a 2009 meta-analysis conducted by the Institute of Medicine concluded that the impact of smoking bans on short-term heart attack rates was real and substantial: “Even a small amount of exposure to secondhand smoke… can cause a heart attack,” one member of the IOM panel informed the New York Times, urging that “smoking bans need to be put in place as quickly as possible.”
This report had, however, omitted one of the largest studies of secondhand smoke and heart attacks conducted to date. A 2008 study covering the entire country of New Zealand—a population smaller than England’s, but bigger than the American towns previously studied—found no significant effects on heart attacks or unstable angina in the year following implementation of a smoking ban; hospitalizations for the former had actually increased.

Contradictory research continued to come in. A clever study led by researchers at RAND Corp. in 2010 tested the possibility that the large reductions identified in small communities were due to chance. They assembled a massive data set that allowed them to essentially replicate studies like those in Helena, Pueblo, and Bowling Green, but on an unprecedented scale. Whereas those studies had compared just one small community to another, the RAND paper compared all possible pairings of communities affected by smoking bans to all possible controls, for a total of more than 15,000 pairings. They stratified results by age in case there were differential effects on the young, working age adults, or the elderly. And in an improvement on most other studies, they also controlled for existing trends in the rate of heart attacks.

The study found no statistically significant decrease in heart attacks among any age group. The data also suggested that fluctuations in heart attack rates were common, indicating that comparisons of small communities would frequently turn up dramatic reductions due purely to chance; large increases in heart attacks happened about as often. This explained the headline-grabbing dramatic results in places like Helena or Monroe County that eluded replication in larger jurisdictions. The conclusion of the study was blunt: “We find no evidence that legislated U.S. smoking bans were associated with short-term reductions in hospital admissions for acute myocardial infarction or other diseases in the elderly, children or working age adults.”

A 2012 study of six American states that had instituted smoking bans came to a similar conclusion. So did a 2014 study, which is notable for being co-authored by some of the same researchers who had previously published papers suggesting that the Colorado towns of Pueblo and Greeley had experienced reduced rates of heart attacks after implementing smoking bans. When Colorado enacted a statewide ban, the authors had an opportunity to see if their earlier results could be duplicated across the larger population of nearly 5 million people. No effect appeared. As an additional test, they re-examined the data excluding 11 jurisdictions that had already implemented comprehensive smoking bans: The statewide ban still showed no effect.

In the paper’s admirably honest commentary, the authors reflected on the reasons that earlier studies, including their own, had overstated the impact of smoking bans. The first is that small sample sizes allowed random variances in data to be mistaken for real effects. The second is that most previous studies failed to account for existing downward trends in the rate of heart attacks. And the third is publication bias: Since no one believes that smoking bans increase heart attacks, few would bother submitting or publishing studies that show a positive correlation or null effect. Thus the published record is likely unintentionally biased toward showing a larger effect than truly exists.

Do read it all.

Friday, 10 February 2017

If in doubt, blame the fat kid

The NHS is in the depths of its annual winter crisis, with waiting times and demand at record levels, as the Telegraph reports:

The number of people waiting more than two months to start cancer treatment after an urgent referral was 25,157 in 2016 - the highest on record and almost double the 13,191 in 2010.

Official figures for December reveal just 86.2 per cent of A&E patients were seen within four hours - the worst figure on record.

One of the few benefits of the annual NHS crisis is that it focuses people's minds on the reasons why demand for health care is rising. Most of the time, people are happy to blame the usual scapegoats of smokers, drinkers and fatties, but this is rhetoric designed to pursue political objections. Most of the people in the health service know that it is nonsense and that the real cause of rising demand is the rapidly ageing population. When the winter crisis hits, this has to be acknowledged, because you stand no chance of solving a problem until you know what it is.

But there's always one chump who cannot see beyond 'public health' mythology. I hereby nominate Dr Ian McColl as my Moron of the Month...

Lord McColl, a former shadow health secretary and former professor of surgery at Guy's Hospital hit out at the dietary habits of young people during a House of Lords debate about rising pressures on the NHS.

"It's not so much the old people getting older - because old people have always been getting older," he said.

"The difference in the last 30 years is the grotesque increase in young people getting fatter and fatter."

This is so mind-bogglingly stupid that it barely requires rebuttal, but here are some facts. The graph below shows usage of A & E by age group.

The oldest age groups, along with infants, are most likely to attend A & E - and their numbers are growing rapidly. As the Telegraph notes:

Health officials say the service is coping with "unprecedented" pressures amid a rising ageing population, with an extra 1 million people aged 65 and over since 2010. 

Here are the reasons why people go to Accident and Emergency:

Unsurprisingly, they are mostly accidents and emergencies, not chronic obesity-related conditions. In any case, you would have to be extremely obese to suffer from an obesity-related condition as a teenager.

And even if people were turning up to A & E to have their obesity-related conditions treated, teenagers have a lower rate of obesity than any older age group. 11 per cent of 16-24 year olds are obese, compared with 34 per cent of 55-64 year olds or 29 per cent of 75-84 year olds.

Yes, it is true that 'old people have always been getting older' (actually, it isn't, but let's be charitable and assume he means since the NHS was created). It is also true that the NHS budget has always been rising. It takes wilful ignorance or flat-out imbecility not to see that these two facts are connected.

It should go without saying, but let's say it anyway: the winter crisis in Accident and Emergency is not being caused by a glut of fat teenagers needing urgent treatment for their (largely non-existent) obesity-related diseases.

PS. In not entirely unrelated news, I call for the abolition of the House of Lords in today's City AM.

Thursday, 9 February 2017

Anti-vaping junk

More anti-vaping propaganda came out of America yesterday via that laughable rag Tobacco Control. I wrote about it for Spectator Health.

Ever since e-cigarettes became mainstream consumer products circa 2012, there has been a steady flow of anti-vaping scare stories. In the last 12 months, it has become a flood. The stories nearly always emerge from the US, usually from California, and focus to three claims: that e-cigarettes are as dangerous as smoking, that they don’t help people quit and that non-smokers who use them are more likely to start using tobacco cigarettes.

These claims have been debunked so many times that they can fairly be described as ‘zombie arguments’. Impervious to reason, they stagger on. Only yesterday, a high-quality study funded by Cancer Research UK showed that e-cigarettes are vastly safer than smoked tobacco — but this will not stop someone in the Bay Area claiming the very opposite next week. 

For every piece of evidence showing that youth smoking rates have plummeted since e-cigarettes became popular, there is a blowhard in Philadelphia who insists that vaping is a gateway not only to smoking but to crack cocaine. For every report from the Royal College of Physicians showing that e-cigarettes help people quit smoking, there are a hundred activist-researchers in San Francisco claiming that vaping makes quitting more difficult.

Do read it all.