The Covid-19 lockdown provided opportunities for enterprising people to circumvent the often irrational bans on everything from can openers to cigarettes. By doing so, they served a moral purpose. Black markets have always served to keep government in check.

Prejudice against smugglers is almost universal. Most people simply dismiss smuggling as a crime. But ask them what exactly smugglers do that is so bad, and few will be able to explain their position in great detail.

Black markets exist because there is a demand for goods or services that are otherwise prohibited by government, or are heavily taxed. In a few cases, the prohibition might be justified, but usually, it is not.

Consider, for example, the prohibition on so-called ‘non-essential’ goods during South Africa’s hard lockdown, or the lengthy prohibition on alcohol and tobacco, neither of which served much purpose.

Black markets during lockdown

It is thanks to smugglers that most smokers in South Africa were able to continue smoking, despite government’s diktat that this simple pleasure should be denied them. Most managed to avoid the severe withdrawal symptoms that would have made coping with the isolation and loss of income due to draconian and irrational lockdown regulations that much harder.

The irritability that comes with withdrawal can be explosive, and increase the incidence of domestic unhappiness and even violence. For many people with mental health issues, as well as recovering addicts, smoking is an invaluable crutch that keeps them sane and sober. It is thanks to smugglers that the negative impact of the tobacco ban wasn’t much, much worse.

As it turned out, smoking proved to be somewhat protective against Covid-19, so whichever way you look at it, cigarette smugglers did both smokers and public healthcare a favour.

The black market in alcohol and tobacco also provided income opportunities for many thousands of South Africans who were unceremoniously prohibited from earning a living, in the speculative hope that condemning people to debt default and starvation would somehow save lives.

I have friends in the tourism and entertainment industry, many working informally and therefore ineligible for any government-funded relief, whose only source of income since the start of lockdown was sourcing and distributing black market goods.

‘Tax morality’

Many opponents of smuggling will say that they merely avoid paying taxes, and that that is bad. This is a sore point not only for government officials who are denied the taxes, but also for competitors who pay the taxes legally required of them.

The government likes to talk of ‘tax morality’. This term is intended to imply that paying taxes is, ipso facto, moral. This should be far from a settled matter, however.

What is moral about an arbitrary tax on specific goods or services? Why should government take a cut when someone, say, imports inexpensive clothing from Vietnam? Why should government tax alcohol or tobacco?

The argument that import taxes protect local industry is weak. What they do is protect inefficient local industry from competition. This harms consumers. When the poor need to pay 40% more for clothes, just to keep a few inefficient and failing local textile producers in business, is that moral?

Consider the television licence, which is a tax levied on everyone who has ever owned a television, supposedly to fund a moribund and bankrupt state broadcaster. What is moral about TV licences? Why do we even need a state broadcaster, when private alternatives can offer news and entertainment that is better and independent of government propaganda?

That sin taxes protect public health by reducing consumption is also a weak argument. Consumption of products like alcohol and tobacco is notoriously inelastic. The price of these products may affect the behaviour of occasional smokers, or moderate drinkers, but it does little to affect the behaviour of habitual, heavy drinkers or smokers.

The total prohibition of these products, and the exorbitant black market prices smokers and drinkers were prepared to pay to sustain their habit, demonstrates just how ineffective sin taxes really are.

Why is it moral, in any case, for government to protect people from their own lifestyle choices?

Even in cases where the prohibitions seem justified, such as hard drugs, what have they really achieved? Violent criminal enterprises have been enriched, as have corrupt government officials. Drug users have been impoverished, and lives have been unnecessarily ruined by incarceration or the threat of prosecution. All this has had minimal, if any, effect on the prevalence of drug use, while making drugs less safe for users.

Before governments started to ban hard drugs around the turn of the last century, was the world mired in crushing epidemics of drug abuse? No, it wasn’t. Drug abuse was a marginal problem.

Big picture on tax

When person A produces a good or service that person B is willing to pay for, by what right does government intervene and levy a tax on the transaction, so that person A will sell less, and person B has to pay a higher price? That surely makes everyone worse off?

The bigger picture does not improve the case for taxes much. It is true that even a minimal government requires some tax revenue in order to provide the basic services needed to protect life, liberty and property.

Such taxes can best be levied as a simple flat tax on income, or a consumption tax. Milton Friedman’s negative income tax is a great model that provides a social safety net without unduly distorting economic activity, and without necessarily involving government in the provision of all sorts of social services.

However, modern governments don’t just raise the minimum taxes they need. They raise as much tax as they possibly can. Tax-and-spend is how most governments justify their existence.

They promise voters more free stuff than their opponents do, in order to win power. The most important aspect of that power is the control of the public purse. Once they gain control of the public purse, they spend tax revenue in ways that benefit their friends, families, supporters and constituents, building a corrupt patronage network that, they hope, will strengthen their continued grip on power.

Although this process has always been a feature of public politics, at every time, and everywhere in the world, South Africa has recently suffered an extraordinary amount of public corruption.

When taxes are wasted on dysfunctional state-owned enterprises, on corrupt private interests, on inefficient government services, and on personal enrichment of politicians, where does that leave ‘tax morality’?

When economic activity gets depressed by government policies, yet government wants to pay for its policies by raising yet more taxes, how is this moral?

Neither excessive taxation nor misspent taxation is moral. It is hypocritical of government officials to talk about ‘tax morality’ as if the desire not to be taxed to pay for corrupt and inefficient government is somehow a failing on the part of citizens. Resenting – or avoiding – excessive and misspent taxation is perfectly natural, and in many cases, perfectly just.

Minimising black markets

A great test for how honest, fair and efficient governments are lies in whether they order affairs in such a way that they provide minimal incentives to smugglers.

When taxes are reasonable and government works well, there simply won’t be much for smugglers to do. Black markets almost always arise as a result of irrational, ineffective or counter-productive taxes or prohibitions.

Those smugglers can play a tremendous role in protecting people from their governments, and in helping them to develop and thrive despite their government’s misguided economic policies, corruption, or other failures.

Good arguments can be made that smugglers and pirates helped spark Britain’s industrial revolution, and that illicit trade made America the success it is today.

In both cases, they counteracted the harmful impacts of prohibitions, colonial trade restrictions, protective tariffs, and excessive taxation.

Black market smugglers introduced economic liberalism to these countries before their governments were forced to adopt economic liberalism as the norm, leading to the greatest improvement in public welfare in recorded history.

Producing the things that meet the needs and wants of consumers is a moral good. That production will happen, whether or not government intervenes. If government imposes too heavy a burden on legal trade, producers and distributors will find illicit means of satisfying consumer demand.

Contrary to popular belief, they’re not wrong to do so, since it limits the extent to which governments can restrict trade and confiscate wealth for its own purposes.

Smugglers have always kept a check on the abuse of government power to direct production, restrict trade and impose excessive taxes. By doing so, smugglers serve a great moral purpose.

So let’s hear it for the smugglers, the illicit producers, and the black market traders.

The views of the writer are not necessarily the views of the Daily Friend or the IRR

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19 COMMENTS

  1. Thank you Ivo.
    I always find your articles well researched, thoughtful and interesting.
    I know you are a pro-vaper, having quit the real thing a few years ago. An article on this would be interesting considering the new medical evidence coming out showing lung epithelial damage as a result of chemical interactions previously not known of. E-cigarettes are also a legal way of paying less smoking tax to our ruinous government, so it would be a legal tax dodge (of sorts) but for the possible health consequences.

  2. Irrefutable logic. Thank you. Just one thing though: even a small tax represents involuntary servitude. Once you allow that, where do you draw the line? How to finance government in a free society? It has to be voluntary. Only then shall we never be slaves. Government by consent. Oh, the dreams!

  3. I agree, this is an excellent analysis. I see the downside being that smuggling is an illegal activity and it does attract criminals into it’s business. The downward spiral of lawlessness against the state (ala Al Capone) is inevitable. I don’t think that is a desirable state to be in.

    • In a ‘Capone’-type state, the big problem is that the amount of unrecorded cash sloshing around makes it easy to bribe eminently bribeable local government officials and underpaid police to “look the other way”. And the end result is a city, or even a state, that is effectively being run by criminals! OK – there’s a good chance that the ANC has ALREADY got South Africa into that situation, but there’s no need to actually make it EASY for the criminals!

  4. As usual, Mr Vegter, an excellent and thought provoking article.
    In addition to the black market trading of illegal goods, as defined by governments, there are also those illegal occupations that could have earned government some lucrative income taxes.
    All of your arguments can be applied to sex workers as well. If their occupation is legalized, think of all the advantages that will bring to them, their clients and government.
    In the end, it’s not government’s responsibility to be the protector of the people’s morals but rather their liberty.
    Vivo liberum.

  5. An inconvenient truth, for starry eyed intellectuals, who use worn out cliches that power corrupts, is that without money power does not exist. Think of the German wartime population who for ever live with the guilt of funding a government through the morality argument of taxes.

    Tarred and feathered as being part of the ugliness of it all, involuntarily complicit in the crimes of the state. Tax unfortunately is all but swept under the rug by far too many, as a powerful device that can maintain the status quo of a tyrannical state.

    Power without tax is mute. Corrupt power funded by taxing honest citizens blood, sweat and tears only lasts until the crimes of the state infect the citizens with a nausea of being effectively complicit in the crimes they enable.

    Morality chooses her friends carefully, she never turns a blind eye, or sacrifices her principles. Tax may be moral, if the state is moral, cross that bridge and history tells us morality will have her hanging party and we will all be invited.

    Have a beautiful day
    Bob

  6. Very well written, Ivo, for the higher IQ readers. The others will just not bother to read or will not understand the logic and quit halfway through.

  7. Thank you Ivo for yet another insightful piece – I can just see the lily-livered, blue-stockinged, limp-wristed wokish brigade wringing their hands in anguish! Beautifully articulated, well done.

  8. Good one, though I wouldn’t agree that smugglers and the black market keep a government in check because circumvention of stupid laws and excessive taxation is more an act of survival than an attempt at changing the mind of a government. Perhaps one day the cops will bust some cigarette smuggler and find a shrine dedicated to Nkosazana Dlamini-Zuma for all her efforts to create “alternative informal employment”, but I for one look forward to finishing my first novel and if lucky enough to be picked up by a foreign publisher, I can give SARS the good news that I’m going to change my tax residency…

  9. I would just like to add my congratulations to Ivo, for a very well written and easy to read article that, to me, concisely summarizes the free market into; if A wants x and B supplies x, at a price that A agrees with, then why not let A buy it from B and both are happy.

  10. What we really need is a tax boycott to bring the thieves to their knees.
    As as a moral citizen I should not be paying taxes whilst knowing full well that my money is being stolen and misappropriated.
    If we just stand idly by and watch the thieving happen we are effectively aiding and abetting the criminals who masquerade as a government. Any ideas as to how we make a boycott happen?

  11. Taxes are simply Government legalised theft. There is no problem to pay government for a service they provide at a reasonable price. But demanding payment for nothing in return is extortion and forcing you to pay using taxation is blatant theft.

  12. OK – now I’m taxed by PAYE on my private pension (i.e. my life savings). And just what services do I (as a pale male) get for my money? Education? No, we paid for private schooling for our two boys. Medical? No – I have a medical aid, and pay the excess. Policing and lawn’order? Not noticeably. Roads and transport? Only when I go THUMP into a pothole do I notice what’s NOT being done. Anyway, the petrol taxes SHOULD pay for the roads. And, what public transport?

  13. I agree with most of what you say, but there are a few practical problems…

    Drugs (including legal medicine) is mostly addictive. With addiction, people’s free will is being lost, thus you do need to police this.
    For instance, if Cocaine would be legal, I would be able to advertise, give people it for free in the beginning and put it in products like cool drinks. Before you know it, I will be able to charge exorbitant fees for my products and everyone will pay…as is the case with cigarettes and alcohol.

    Import tax makes a lot of sense, as other countries are competitors. It has happened many time already where the government did not protect local businesses with export tax, thus these businesses went bankrupt and the overseas competitor increased their prices as there is no more competition any longer. Other countries does not play by the same rules. (I can explain this in more detail if it is unclear)

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