Essay About Externalities Of Smoking Of Tobacco Products And Tax Revenues

Effectiveness of Taxation on Tobacco Products
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Introduction:Externality occurs when the production or consumption of a particular good or service causes a benefit or cost to an individual or to a society who were not directly involved in the process of production or consumption of the good or service (Begg, 2009). The externalities of smoking of tobacco products cause adverse effects to the individual and to society by means of making non smokers becoming passive smokers. We find that in US almost 12 million people have died over the 40 years due to smoking of cigarette and other tobacco products (Kay, 2007), which clearly indicates that smoking of tobacco products are injurious to the health.In western countries, a 10 percent price raise causes decrease of 3 to 5 percent in consumption of cigarettes (van Baal et al, 2007). We can evidence that price rise in tobacco products caused by increased taxation leads to the reduced consumption of cigarettes and other tobacco products. Increased tax revenues, reduced consumption of cigarettes, gain in life years of individual, reduction in the cost of health care expenditures are the outcomes of the taxation on smoking of tobacco products. In this essay we consider the effectiveness of taxation on smoking of tobacco products to the society and to the government.Effectiveness of Taxation:Taxation and subsidies are inefficient without the presence of externality (Rapanos, 1992). It can be seen that the taxation can be used as a tool to remove the inefficiencies caused by externalities in an economy. Since smoking of tobacco products causes a negative externality government raise the prices of cigarette and other tobacco products through increase in taxation. The impact of taxation can be seen in reduced smoking prevalence in youngsters and adults, reduced absenteeism to work, attainment of healthy life, reduced mortality (Reed, 2010). As taxes being increased people are less willing to smoke cigarette and this influences several age groups to either reduce the frequency of smoking or to quit smoking. Taxation indirectly leads to the reduction in absenteeism to work, which again reflects in the gain of economy of a nation.Responsiveness to the price rise is dependent on the age, income level of individual, geographic location and the alternatives of tobacco (Doran et al, 2010). Theoretical model of rational addiction by Becker (1988) suggests that younger people are more responsive to the price rise in cigarettes than the highly educated, high income group adults. Income level is indirectly related to the price sensitivity of tobacco products which is evidenced more in the young individuals as they would not be able to spend as much as the spending of adults. Adults in the age group of 45 to 59 are also sensitive to price raise and show reduced prevalence in smoking of cigarettes (DeCicca, 2008). Adults are more concerned about the health consequences than the change in prices. Cancer, chronic heart failure and stroke are the major diseases that are arising as a result of smoking of tobacco products. With all these health factors being as a negative effect due to the smoking of harmful tobacco one can logically conclude that any means to reduce the consumption of tobacco would be benefit to the society and using taxation as a tool to achieve it would be one of the effective ways. Geographic location also plays a vital role in the smoking behaviour of a person. Evans and Farrelly (1998) evidenced from their research that states with high tax rates for tobacco products showed that people involving in high consumption of Nicotine due to long length of smoking the cigarette when compared to states with lower taxes. Disadvantage of the taxation is that due to the limitation to afford for the tobacco products, young individuals are involved in unhealthy activities like deep inhaling and leaving shorter butt in the cigarette while smoking. These kinds of activities are spoiling the health and the environment as well.Apart from social concerns the government also implement the taxation to generate tax revenues. On imposing a 40% tax induced price rise on cigarettes, leads to a revenue gain of $365 billion for the US government (Ahmad, 2008). Governments can use these generated tax revenues to educate the public on the harmful effects of the tobacco products, to conduct health check-up and also to implement social welfare programmes which can be an effective way to communicate the necessity to quit smoking to a large number of people. It can also be seen that due to the availability of substitute products of tobacco the taxation on cigarette makes people to involve in higher consumption of the alternatives available. Cigars, loose tobacco are the main alternatives consumed in Vietnam due to the price raise in cigarette packs (Doran et al, 2010). Smuggling becomes the other alternative to get access to the tobacco products. Due to the price differentials and informal distribution networks smuggling prevails. Government must take actions in order to curb the smuggling process by enacting severe regulations over smuggling of tobacco. Taxes are the major proportion in the price of cigarettes. In UK, the price of a 20 pack cigarette is above 6 pounds in which 76% of the price is formed by the tax component alone. A price raise of 5% in UK shows that smoking level decreases from 21% to 20.63% which adds up to 190,000 adults who quit smoking (Reed, 2010). Excise tax, ad Valorem tax and Value added tax are the three major components involved in the pricing of a product. The ad Valorem tax is at the rate of 24% of the retail price and VAT is at the level of 17.5% in UK (Reed, 2010). As these taxes increase, the price of the cigarettes is increased in turn causing reduced consumption. Cessation in smoking leads to more revenue generated to the government as people are able to work healthily for more number of years and thereby paying more taxes on their incomes which is another benefit to the economy of the country.