Does increasing Cigarette Tax Help in Reducing Number of Smokers? To what extend does it decrease smokers if it leads to decreased smokers?
Abstract
Many governments have continuously increased i cigarettes taxes for the last decades. However, governments have been recording increased revenue from cigarette taxes despite decreasing number of smokers. The revenue raised has been used to finance ant tobacco campaigns across the country. Tobacco is a habit forming commodity this makes adults who have been smoking for long not to change their habits in short run. Researchers have given two main reasons for their behavior. First and foremost, the increased retail prices from an insignificant proportion of their income. Secondly, they are less sensitive to increase in taxes than young smokers. Increased taxes impact decreases the number of smokers in long run because it makes young smokers to quit smoking as well as preventing others from starting smoking. This paper aims at establishing how increased taxation influences smokers. Precisely, it reveals the impact of increased tax on Canadian smokers both in short and long run. The paper uses regression analysis to indentify the relationship between numbers of smokers and increasing cigarette tax. The regression results show a weak relationship between smokers and tax in the short run. This is attributable to habit forming nature of tobacco. However, the data obtained indicates that the number of smokers decreases overtime due to majority of youthful smokers quitting in addition to decreasing percentage of prospective smokers.
Taxes form the largest source of government revenue in many countries. It is advisable for government impose excise taxes to control the use of commodities whose consumption is deemed as undesirable. The negative effects of cigarette smoking have been used by governments across the globe to justify increased tax on tobacco products. The increased taxes lead to increase in retail prices of cigarettes and this discourages price sensitive consumers from smoking. Recent studies have exposed the serious health problems attributed to smoking for example, lung cancer and heart diseases among other ailments. Economists have tried to come up with models to explain the effectiveness of tax as a method of decreasing smoking.
Objectives of study
This paper has three objectives; first, it tries to uncover the effect of taxation on number of cigarettes smokers in Canada. Secondly, it tries to uncover other effects of cigarette tax apart from influencing demand for cigarettes.
Lastly, the paper will try to come up with a model which can be applied in determining the effect of increasing tax on short run and long run demand of cigarettes. Precisely the model will try to determine the number of people who may quit smoking due to increased tax cigarettes which are transferred to consumer by increasing retail prices.
Literature review
According to international tobacco net work, the government should intervene in the tobacco market because use of tobacco has a lot of financial and fiscal cost on smokers, non smokers and government in general. International tobacco net work found out that, seven out of ten addicted tobacco users in high income countries wish they never started smoking.
Impact of tobacco taxes on price and demand of cigarettes
It is generally accepted by researchers that a normal good has a negatively sloping demand curve. However, the nature of demand curve of cigarettes has been a contagious issue among economists. Many economists are of the view that tobacco does not obey the law of demand because it is a habit forming drug (Gruber, Jonathan,22). However, others are of the view that tobacco though a habit forming good its demand decrease with increase in price therefore the demand curve is elastic. According to Peterson et al., 95, cigarette demand is negatively related to price and they estimated the price elasticity of demand to be within -0.3 to -0.5.
Many studies have been made to show how smokers change their demand for cigarette when prices change. Previous studies indicate that increased cigarette tax has less effect on smokers in developed countries than in developing countries. Warner ,530 argued that, demand for cigarette is more responsive to price in developing countries than in developed countries like Canada. He attributes this to low income in developing countries which may not be adequate to cover the additional price brought about by the increased cigarettes tax.
Recently, researchers have tried to model the addictive nature of cigarette smoking. The researchers have first defined an addictive commodity as one whose previous consumption influences present consumption positively. This is attributable to increasing marginal utility as one takes cigarettes day in day out. Some researchers have taken smokers as rational consumers while others take them as myopic. Those who believe in Myopic nature of smokers research have developed economic models assuming that smokers make their current decision to smoke without considering any future negative effects attributed to smoking.
In addition, researchers have differed on how the demand for cigarettes changes when consumers’ income increase as retail prices increase due to increased tax. All that withstanding researchers have agreed on the fact that, the effect of increase of cigarette tax on high and low income citizens is different. A study conducted by Concordian University economists found that high taxes make middle and low income earners to quit smoking as well as preventing others from joining. On the other hand, they found that high income earners consumption is not altered by increase in taxes. They therefore, argued that cigarette taxation may assist the government in distribution of resources better because the rich citizens are likely to continue smoking despite increased taxes.
Economists agree that the base line of purchasing any commodity is to derive utility upon consuming the commodity. Researchers have found that consumers allocate higher proportion of their income on commodities according to utility derived from them. Smith, 21 studied amount of happiness lost or gained by smokers after increase in cigarette taxation. He used data from general surveys from Canada to get self reported data on happiness. The study showed that taxation makes smokers happier because it acts as a self control device which makes them to either smoke less or quit smoking. However, his research did not measure how much less they smoke after increase in tax. Philip, smith, 21 investigated the effect of cigarette tax on youthful smokers between eighth grades to twelfth grade. They relied on data from US national educational longitudinal survey and found that a small increase on tobacco tax has negligible impact on youthful smokers. However, they could not explicitly state how large tax could influence the same youthful smokers. Conversely, in 1990’s cigarette smoking was diversely affected by high taxes according to study done by Jonathan ,116. Recent research by Wei Tan ,36 has shown that taxation decreases smoking in long run and short run despite cigarettes being a habit forming commodity. The research also showed that smoking habits are also influenced by other factors affecting demand like advertisement. It found that cessation advertisement makes smokers to attempt quitting. In addition, it showed that intensity of youthful smoking falls with increase in cigarette taxes. The research attributes this difference to low purchasing power of the youthful smokers, their low levels of addiction as compared to adults as well as their large price elasticity of demand. The researchers further identified that youthful smokers have high sensitivity to taxes than adults in general and are likely to decrease their consumptions on over taxed commodities. The researchers also stated that tax increase affects adult smokers less in short run than youthful smokers. They used this argument to determine the effect of the changing adults’ smoking habits to government revenue raised though cigarette taxation. They argued that, although adult smokers change their smoking habits slightly, the decrease is not significant enough to offset increase in additional tax revenue collected due to increased tax. In addition the high drop of cigarette smoking among the youth may not be sufficient to erode the entire benefit got from increased taxation. They attributed this to the fact that the number of youthful smokers is less than adult smokers. Different research has shown that in long run the amount which the government gets from cigarette taxation falls drastically because of decreased number of youthful smokers who become adults.
Appropriate level of taxation
Smith, 21 argued that cigarette taxes are justified by the external costs associated with taxation. In his research he stated that the government should charge tax high enough to cover the external costs of smoking. These costs include health damage caused by passive smoking as well as medical costs brought about by smoking. However, studies have not provided a clear way of calculating these costs making governments to overtax smokers. World Health Organization has put pressure on governments to keep on increasing the cigarette tax to exceed levels of pure externalities to ensure that people exercise self control. This has attracted a lot of criticism from some economists as well as smokers worldwide.
Various researches on related topics have been carried out. However, the researchers do not give adequate information which can be used to neither determine amount of cigarettes smoked daily nor number of smokers. In addition, the researchers do not investigate differences of smoking habits between youths and adults after imposing cigarette taxes and give precise information on the same. It is vivid that, research on differential effects of cigarette taxation on youth and adult smokers is scarce. This paper will focus on such analysis. Moreover, according to a research done by price water house cooper in the year 2000, many countries have recently experienced large cigarette tax increases and WHO has continued to push governments to increase the taxes to check the negative health and economic effects of smoking. However, studies have shown that WHO has been unable to come up with a precise formula to determine all externalities associated with smoking. Research on cigarette black market has shown that smuggling of cigarettes across states with different tax rates has been growing over the last decades. However, due to in availability of reliable data this research will not study how such increased black market transactions may impact on the economy negatively.
DATA
Research methods
In order to determine how taxation affects cigarette consumption for men and women, it is important to observe how changes in tax rate over several years affects each set of population as well as the number of cigarettes smoked. This can be done by the use of the following model.
Smokers it=β i tax i,t+ β2 Log (G D P)I,t+ β3C P I i,t
For simplification purposes in data analysis only average taxes are used meaning that some provincial taxes might be high and others might be a bit low. All the variables are obtained and analyzed using SPSS to get the coefficients.
Results analysis, discussions, conclusion and recommendations
The result for regression in table two has all the explanatory variables cigarette tax, Log GDP (natural log of gross domestic product), and consumer price index (CPI).the regression for smokers in table three clearly shows that tax rate does not significantly affect the adult smoking population. The coefficient on tax is -0.07 it decreases in magnitude as more and more explanatory variables are included. The same is clearly depicted in the table for men and women when done separately i.e. the signs of their coefficients are negative. The coefficient -0.07 is an indication that adult smokers may not quit smoking in short run because they are addicted despite increased excise taxes. The increased tax may not be high enough for the adults to feel much effect on their incomes. Therefore, increased cigarettes taxes decrease cigarettes smokers by 0.07.
It is essential for the government to consider the effects of increasing any tax before proposing and implementing any tax policy. Precisely, it is equally important for Canadian tax authorities to learn the effect of increasing cigarette taxes. The above discussions have provided negative health effects of smoking and other externalities as the reasons behind increasing cigarette taxes. In line with government aim of raising revenue, low taxation elasticity justifies governments’ tendencies of hiking cigarette taxes. This paper has developed a model which allows a longitudinal regression for adult smokers. The model has in cooperated key economic variables like gross domestic product (GDP) and consumer price index for several years i.e. years from 1999 to 2005. It has therefore given a clear effect of taxation on cigarette smoking in Canada.
The regression results have shown that taxes have negative effect on adult smokers in Canada though the effect in not very significant. This is because many adults have long experience in smoking making them to have low price elasticity. It can therefore be assumed that the adults derive higher utility than additional retail price which result from the increased tax.
The increased cigarettes tax is therefore likely to improve the Canadian welfare in long run more than in short run. It is likely that the country may reach a level where the number of smokers are insignificant when compared to the non smoking proportion of the Canadian population.
Nonetheless, to fully uncover all effects of increasing cigarettes taxes further research is needed. Precisely future researchers should focus on: first and foremost, net increase in welfare as a result of decreased smoking. This should focus on the increased future health benefits of decreased smoking, increased worker productivity due to decreased time wasted when smoking.
Secondly, future research is recommended on effect of increased cigarette taxes on adults with different income levels and different religious affiliations. Third, focused research should be carried out to uncover taxation elasticity of young smokers. Finally, thorough research should be carried out to uncover the effect of increased tax on black market cigarettes transaction which may not only harm the economy but also give a false impression of decreased number of smokers.
Appendix
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