[dbuxton]

Yes, here in the UK cigarettes are legal but smuggled cigarettes are a massive (£multi-billion) business because taxes are so high.

Obviously there is a point at which taxation is virtually equivalent to prohibition (1,000,000%?) so the aim of a good tax in this arena is to (1) discourage consumption (2) provide some revenue to offset against social costs of the activity (healthcare costs of smokers, for example) while (3) not being so outrageous as to push the activity underground altogether.