Tobacco is a deadly habit which is very common among all societies yet what we want to ask ourselves is: Does imposing price increments limit the habits among the smokers ?
It is a fair question to ask!
Mustafa,
Indeed a good question. For all products there is a price ceiling above which someone will no longer buy the product or look for a substitute product. However, tobacco products are highly addictive and, for that reason, consumers tend to pay whatever the price is. So, the ceiling will be very high. To my knowledge, there is no empirical evidence tat excise taxes on tobacco products influences consumer behavior significantly but it may peripherally. Another argument for taxing such demerit goods is that it helps pay for the additional healthcare costs caused by smokers and paid by society. But that assumes that the government (state) pays all these extra costs, which may be the case to some extent but not necessarily so. Largely, these additional costs are borne by all people carrying health insurance (through higher premiums) and not by the state.
In sum, changing consumer behavior through taxation has only limited effect in regard of addictive products such as tobacco and alcoholic products.
Paul: This is an excellent question!
Studies in the United States and the United Kingdom find the price elasticity of demand for cigarettes is about - 0.40
That means a price increase (i.e. tax) of 10% reduces the quantity demanded by 4%
@Robert van Brederode I have a full consent to all what you have said. You have dissected the topic through all of its aspects. Yet, the conclusion was as expected the taxes only limit the habits of smoking as the smokers are willing to pay whatever the amount is in order to relieve any stressors they do encounter. The socioeconomic class can and cannot play a role depending on the entire package (living environment and situation) to such smokers. It is a very intriguing topic. Will be thrilled to share the Saudi Arabian experience with tax increase once the study is published.
@Paul Stock the question is: did this 4% decrement after tax increase seem to be any significant in terms of the healthcare costs as well as the smoking habits??
The WHO argues that increasing the price of tobacco product is the most potent and cost effective policy in tobacco control. The WHO insists that higher price of tobacco product would reduce the affordability of tobacco products. This, in turn, would induce consumer to cease smoking, while at the same time prevent others from start smoking. In agreement with Paul Stock Paul, it is deemed that price elasticity of demand for cigarettes is at average - 0.40 in high-income countries and about -0.50 in low- and middle-income countries. Thus, it is assumed that lower income people tend to be more sensitive to price change. In addition, among all taxes, tobacco excise is the most effective one as it is exclusively levied to tobacco product and it raises the prices of tobacco product relative to price indices. Accordingly the WHO urges member countries to (1) increase tobacco excise at least 70% of tobacco product retail price, (2) ensure that the increase of tobacco excise higher than the increase of price indices and income, (3) prevent consumer from shifting down to cheaper tobacco product, and (4) strengthen tobacco excise administration. The WHO also maintains that higher tobacco excise tax would provide governments with reliable stream of revenue which can be allocated for improving public health and strengthening tobacco excise tax administration.
However, many researchers suggest that substantial tobacco excise increase would bring undesired impacts. Excessive tobacco would encourage tax evasion and avoidance as it offers large incentive for illicit production and trade of tobacco product. In line with Robert van Brederode, smokers would not reduce tobacco product consumption. Instead, they would shift down to illicit tobacco product which is certainly cheaper. As a result, excessive tobacco excise would simultaneously undermine public health objectives and damage tax base. Policy makers, for that reason, carefully increase tobacco excise while concurrently keep illicit tobacco product under control.
Please find more information on:
- https://apps.who.int/iris/bitstream/handle/10665/44316/9789241563994_eng.pdf?sequence=1
- http://worldcustomsjournal.org/Archives/Volume%206%2C%20Number%202%20(Sep%202012)/06%20Cooper_Witt.pdf
Yudhi, Thanks for the additional information. The reasoning The WHO contradicts itself. If excises were to incite people from starting to smoke and successfully encourage smokers to quit, it would not also constitute a reliable source of income. What happens in actuality is that governments try to establish the price point above which smokers would indeed quit or switch to black market products that do not carry tax and are thus cheaper. The idea is to maximize revenue by ensuring that this price ceiling is not broken. Revenue is the main objective as I see it, and pubic health considerations are mere justification. But perhaps I am cynical.
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