Professor Panagiotis Liargovas explains that increasing tobacco taxes in Cyprus can have unintended consequences due to the presence of a cheaper, unregulated market in the occupied areas.
When price differences become significant, consumers often engage in tax arbitrage, choosing to buy cigarettes from across the divide rather than reducing consumption. This shift leads to a loss of state revenue, weakens legal businesses, and fuels the informal economy. It is not only organized smuggling that drives this trend, but also ordinary consumers who cross to purchase cheaper products.
He notes that, based on the Laffer Curve, there is a point where higher taxes no longer increase revenue but begin to reduce it. In Cyprus, this point may be reached more quickly because of the ease of access to alternative markets.
As a result, tax increases can fail both in raising revenue and in improving public health, since consumption does not decrease but simply shifts location. Liargovas suggests that a more effective policy would involve gradual tax adjustments, realistic pricing, and stronger enforcement measures to keep consumers within the legal market.
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