Wednesday, March 01, 2006

When Selling Vodka is Illegal, Only Criminals Will Sell Vodka

Economics is one of my favorite topics, since it is so poorly understood by pretty much everybody and this lack of understanding occassionally results in unbridled stupidity which usually vexes me to no end; so I thought this was terrific case study. The story is about three weeks old, but I thought it served as a shining example of the oppressive nature of taxation and socialism. From the Wall Street Journal (Feb 10, 2006):
"There was an eerie silence last week at ZAO Veda's vodka distillery, one of Russia's biggest. For the first time in its 10-year history, the plant stopped production. Bored workers kept busy by scrubbing down machinery with Ajax.

It was the same picture in towns and cities across Russia. The country's entire vodka industry ground to a halt, thanks to a Siberia- size bureaucratic snafu over a new tax on alcohol."
This is pretty much the worst case scenario of government interference in business. Governments justify excessive taxes on alcohol, tobacco, gasoline, sex and similar products as "sin taxes". The reasoning behind these taxes is usually that either the taxes themselves will discourage the behavior (read: decrease demand by raising the price) that lawmakers (knowing exactly what is good for us and having a keen sense of right and wrong) dislike, and/or the proceeds of said taxes will go toward programs that discourage the subject behavior. Typically neither happens; the State just makes money off anti-social behavior and therefore has no real incentive to discourage it.

But I digress. Supposedly this tax was to curtail illegal vodka production (Russia already tried banning Vodka in the 80s). Since the industry is already heavily regulated, the black market for vodka is quite lucrative and illegal producers don't focus much on quality. As far as Russia is concerned, the tax was a doubly good idea; in addition to magically curtailing the sales of illegal vodka, the Russian government knows that a 40% vodka tax will exponentially increase revenue and give sorely needed cash injection to a failing government. But they hit a snag and the laws of supply and demand bit them right in the arse.

They couldn't get the tax stamp to the Vodka factories in time. Since it would be illegal after the law went into effect for the vodka manufacturers to ship any vodka without the stamp, the factories stopped production and loose millions of rubles, or whatever it is they spend these days.

So guess who cleans up?
"Though the law was part of a crackdown on fake vodka, it is the illegal producers who have benefited most from the crisis. Bootleg vodka with fake stamps now is filling the void left by legal distillers. That could spell trouble for Russia's public health system: According to official statistics, around 40,000 people die in Russia every year from poor-quality counterfeit vodka." (WSJ)
Yes, the irony is sweet. Illegal vodka sales are through the roof and the criminals make a killing (pun intended, sorry).

The manufacturers have since gotten their stamps so they can pay their homage to the Russian government, but not before giving us a valuable real-life demonstration of socialism is a foolhardy system of running a country.

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