The American Civil War led to the reduction of government revenue and large debts amassed from the financing of war operations. One strategy that the government implemented was using taxes to raise the funds from the public. This approach led to certain products being taxed, for this reason, one of them being tobacco. However, with time, these taxes were effectively recalled with the exception of cigarette taxes, which have remained to the present time. Tobacco has been identified as one of the oldest crops in the U.S and has also been cited as one of the most successful enterprises, providing thousands of jobs as well as increased revenue for the government at local, state, or national level. In the recent past, tobacco products such as cigarettes have been a primary source of revenue owing to the repeated increases accustomed in terms of excise taxes.
According to Reed (22), an excise tax is a duty imposed on several products such as alcohol and cigarettes, amongst others. These taxes are also known as sin tax as they are imposed in order to curb consumption (Reed 25). Given the devastating effects of cigarette smoking, the increases in taxes are often welcomed by public health organizations as this approach is seen as effective in reducing the consumption of tobacco products, which are responsible for millions of deaths around the globe. However, from an economical point of view, this strategy is not received with the same level of enthusiasm as that of the public health stakeholders. This paper will assess the merits, impact, and effects of cigarette smoking and a general assessment of whether the call for a reduction in taxes imposed on tobacco products is effective and logical in the long run.
According to DeCicca and McLeod (43) tobacco products particularly cigarettes have been identified as the products that are responsible for the highest number of deaths in the U.S. approximately one-fifth of all annual deaths in the U.S are associated with cigarette smoking. In addition, cigarette smoking is associated with one-third of all deaths during the middle age in the U.S. According to DeCicca, Kenkel, and Mathios (20) cigarettes smoking is often introduced during the teenage years. This sets a precedence of an impending tobacco addiction, thereby raising the level of risks associated with the deaths resulting from this behavior. Cuyler and Newhouse indicate that cigarette smoking is the leading cause of illnesses such as lung cancer and cardiovascular diseases such as chronic obstructive pulmonary disease (23). This illustrates the seriousness of the effects of cigarette smoking on human health.
Based on a different perspective, cigarette taxes have been a significant contributor to public coffers, whose income has gone forth to sponsor state-run programs that have benefited the entire population. For instance, the 2009 Children ‘s Health Insurance Program Authorization Act led to increased cigarette taxes in which case, a pack of cigarettes was raised from $0.39 to $1.01 per pack (Reed 30). The revenue raised from this approach was intended to cover the cost associated with increased coverage of the State Children's Health Insurance Program (SCHIP). This strategy was lauded by those with interests in public health. However, economists have cautioned against such approaches as a means to reduce cigarette smoking.
Tucker indicates that the increase in cigarette taxes consequently leads to reduced cigarette smoking (25). Consequently, this leads to a reduction in deaths associated with such activities as a result of changed behavior that limits exposure to risks emanating from cigarette smoking. Various studies have been carried out to investigate the effects of price change on consumption, health statistics, and demand for tobacco products. According to DeCicca et al. (29), the most susceptible groups to variances in price are the youth and lower-income populations. In this case, these individuals are responsive to price change owing to their financial status. This finding has been reiterated by the World Health Organization which has indicated that a 10% increase in cigarette smoking would lead to 4% and 8% decrease in cigarette smoking in developing and developed countries respectively.
DeCicca et al. carried out a study regarding the effect of cigarette price increase on approximately 110,000 students from the eighth to twelfth grade on the effects of tobacco policies on consumption among the youth (Cherukupali 35). The findings provided a -1.31 price elasticity of demand. This means that more than 50% of the effect that resulted from elevated prices was on smoking prevalence. In this case, the increase in cigarette taxes would lead to reduced incidence of cigarette smoking. As a result, the health costs associated with cigarette smoking would consequently reduce, hence saving respective governments substantial amounts of costs spent on healthcare.
According to Adam Smith, a 19th-century economist, an excise tax is the most effective market-neutral tax. This approach provides a clear-cut approach of taxing consumables as the increase in taxes on these products effectively increases government revenue without increasing input associated costs such as wages (Gruber 28). This observation asserts that if consumables in this category such as cigarettes and alcohol are increased, their consumption will be decreased. These mixed reactions have pitted the public health interests with those of economic interests. In spite of the projected gains on public health policies, from an economic perspective, the continued increase on tobacco products is bound to lead to serious financial and economic implications. In this case, the tobacco industry being one of the leading contributors of taxes would be seriously affected by such increases.
As a result, of the increased taxes, these will be later transferred to the consumer who is forced to bear the taxes in the form of increased product cost. In the same way, tobacco companies are also affected by the tax increases in that the increased prices leads to decreased demand, hence reduces output. As a result, the demand for inputs required to produce the product is also reduced leading to a reduced workers quo and consequently wages and decreased investment savings. As a result, this approach effectively reduces the amount of taxes paid to the government thereby jeopardizing programs supported by cigarette taxes.
In the past, economists did not consider cigarettes and other addictive products as being affected by economic models of demand. However, in-depth studies have revealed the responsiveness of such products to influences such as price and demand. In this case, the price associated with such products have been influenced owing to the economic principle of the downward sloping demand curve (Culyer and Newhouse 41). In this regard, the consideration of price is not primarily factored on monetary terms but other associated costs such as time.
Therefore, in the assessment of the demand curve based on various econometric models, the price elasticity of demand for tobacco products has been indicated as ranging from -0.3 to -0.5 (Rabin and Sugarman 42). This means that cigarette use is not as elastic as compared to other products. In this case, the demand for tobacco products would fall from the range of 0.3% to 0.5% for a 1% increase in price. This figure demonstrates that although the demand would fall for price increases as a result of tax increases, it is not as incessant as in the case of products with high price elasticity of demand. This trend may be explained in terms of behavioral analysis and econometric models. Cherukupali defines behavioral analysis as the application of experimental psychology on principles of consumer demand (41).
Various experiments have revealed a consistent trend in which case an increase in the price of tobacco products subsequently leads to an increase in price elasticity of demand. This aspect has been attributed to the addictive nature of tobacco products, specifically cigarettes. On the other hand, various researchers have demonstrated that the increase in prices eventually leads to a decline in demand as potential smokers are discouraged from adopting the habit owing to the restrictive price burden, users are encouraged to quit, and former users are discouraged from starting again.
In spite of all the advantages cited for the increase in taxes from a health point of view, economists are skeptic about the aspect of taxation increase on tobacco products as a policy tool. In this case, the underlying reason for increasing excise taxes on cigarettes is also meant to provide funds required to close the widening government revenue and cost gap. However, economists caution this approach given the nature of these taxes. Over time, the prevalence of tobacco smoking is set to decline with time owing to either individual heeding the health warnings associated with cigarette smoking or the inconvenience caused by the increasing financial costs as a result of increased taxes.
According to policy analysts and government officials, the income received from increased taxes is meant to sponsor state programs or reduce government debt. In relation to earmarked programs and projects in education and health amongst other programs, their associated costs are set to increase with time as a result of population growth or inflation. This alternative should be approached with caution as the revenue received from such taxes is set to decline with time, as a result of the circumstances discussed above. Therefore, the reliance on this unstable source of government funding would jeopardize the stability of state programs in the future.
As a result of the mismatch between revenues and program costs, such situations undermine public confidence in the government. This aspect arises in instances where the costs of running the earmarked programs increase owing to either inflation or population growth and which are sponsored by revenue from cigarette taxes which on the contrary, decline with time. In such instances, such programs end up failing as a result of the lack of sufficient funds. The public would view such situations as government excesses that have led to either the misappropriation of funds or increased spending. Therefore, public confidence in the respective state government would decline.
In addition, increases in cigarette smoking would lead to widening tax inequality between the rich and the poor segments of the population. This is because those from poor backgrounds engage more in cigarette smoking than compared to their rich counterparts. Therefore, the increase in taxes would result in a widening gap in tax burdens. This aspect is demonstrated by Tucker who indicates that cigarette taxes, as in the case of consumption taxes are regressive in nature (20). This means that they are more representative of those from poor backgrounds than compared to those from higher income households. In this case, it is estimated that 3.2% of the expenditure on cigarettes is from those of a lower background. This is compared to a lowly 0.4% of those from the top earning level.
Therefore, the increase in taxes will burden the poor. In response to this situation, research indicates that the regressive nature of cigarette taxes is mitigated by the increase in taxes. In this case, as a result of these tax increases, it is proven that low-income groups are responsive to price changes and as such adjust their spending on cigarette smoking effectively. This trend eventually leads to reduced prevalence of cigarette smoking in this category hence reversing the regressive aspect. However, this argument is opposed on the basis of the consideration of the assumption as based on a group rather than on an individual basis. In this case, the argument is inconsistent based on the fact that individually, one will not immediately adjust their behavior on the basis of increased costs.
In this case, economists propose a subsidy or tax reprieve that would protect the low-income groups from being burdened by increased taxes through an alternative that takes into consideration one's tax credit. In this case, policy bodies should institute or increase the revenue received from cigarette taxes by categorizing it as Earned Income Tax Credit.
In conclusion, caution should be taken in consideration of the increase in cigarette taxes. In as much as increase in taxes leads to decreased consumption hence provides health benefits to those concerned as well as public needs, policy analysts should assess the situation from an individual's point of view on the imposition of increased taxes. Cigarette smoking being an addictive behavior, it is highly unlikely to lead to its cessation immediately, as such, even though it might decrease consumption in the future, the present costs incurred should be taken into consideration. In addition, the usage of revenues from tax increases on cigarette excise taxes should be allocated to a program that seeks to encourage changes in cigarette smoking behavior, as opposed to investing it in earmarked projects whose costs increase over time, while that of cigarette taxes reduces in the same time period.
A slight increase in cigarette taxes is recommended to curb the problem of youth involvement in smoking. The number of youths involved in smoking at an early age is disturbing hence imposing higher taxes is necessary to discourage new abusers. Higher taxes will increase the price of cigarettes thus making them unaffordable to low income earners.
Works Cited
Cherukupali, Raajev. A behavioral economics perspective on tobacco taxation. National Institute of Health, 2010. Web. Retrieved from http://www.ncbi.nlm.nih.gov/pmc/articles/PMC2836334/
Culyer, Johnson, and Joseph, Newhouse. Handbook of Health Economics. Amsterdam: Elsevier, 2000. Print.
DeCicca, Phillip & McLeod, Logan. Cigarette taxes and older adult smoking: Evidence from recent large tax increases. Science Direct, 2007. Print.
DeCicca, Phillip, Kenkel, Donald, & Mathios, Alan. Putting out the fires: Will Higher Taxes Reduce the Onset of Youth Smoking. Journal of Political Economy. University of Chicago, 2002. Print.
Gruber, Jonathan. The economics of tobacco regulation. Health Affairs, 2007. Web. Retrieved from http://content.healthaffairs.org/content/21/2/146.full
Rabin, Robert and Stephen Sugarman. Regulating Tobacco. New York: Oxford, 2001. Print.
Reed, Harris. (2009). The effects of increasing tobacco taxation: A Cost Benefit and Public Finances Analysis. Action on Smoking and Health. New York: McGraw-Hill Publishers. Print.
Tucker, Irvin. Survey of Economics. Mason: South-Western Cengage Learning, 2008. Print.
