Question

Do specific taxes really provide the result intended? In recent years, you probably have heard the argument that tobacco taxes should be raised in order to reduce smoking. Since smoking is bad for you, if you choose to smoke, society is going to make you pay for doing so by levying a greater burden on you through a stiff tobacco tax. Discuss the economic impact of imposing such a policy stance. In doing so, identify whether higher tobacco taxes really reduce the consumption of tobacco and make society better off. Or, do higher taxes just mean that people keep on smoking and spend more of their income on tobacco and less on other goods and services?

Answer 1

In my opinion specific taxes provide the intended result. Smoking not only is bad for the person who is smoking but also for the people in the vicinity of the smoker. Hence a greater tax is levied on tobacco and cigarettes. In doing so the price of tobacco will increase due to which some people will either quit smoking or reduce the consumption of tobacco.However this would have a negative impact on the tobacco and cigarette industry as their consumption would reduce. This would have a negative impact on the employment in this industry too. The earnings of the tobacco farmers would also reduce.

Doing this will also enable the goverment to earn greater tax revenue. The elasticity of demand of tobacco is inelastic. In such a case the proportional reduction in consumption of tobacco is less as compared to the proportional increase in the ta revenue of government. For eample if the price elasticity of demand of tobacco is -0.7 then a 10% increase in the price would decrease the consumption by 7% whereas the ta revenue would increase by 25%. Many examples can be seen around the world where increasing the tax has led to an increase in the tax revenue and decrease in the consumption of tobacco.Also many researchers have found out that these taes are used for funding health promotion and disease prevention programmes. This is a win win situation for everyone.

A California simulation study(Ahmad,2005) shows that a 20% tax increase will increase the the tax revenue by almost $10 Billion and reduce the smoking related medical costs by $188 Billion over a period of 756 years.He also found out that the smoking prevalance has reduced from 17% to 12% over a period of 75 years.

So although it is difficult to see a tremendous amount of impact in the short run by following this practice but in the long run it is beneficial for everyone.