Turnbull tax proposal has merit

First published on ABC Online 26 May 2009.

In his response to the budget Malcolm Turnbull proposed a 3 cents per stick tax on cigarettes. This was proposed to fund a gap in the budget that arose through Turnbull’s opposition to abolishing Medicare tax concessions for certain high income citizens. Here I ignore this latter issue (it is discussed here) and concentrate on the isolated case for the tax increase.

Currently taxes on a packet of 20 cigarettes are $4-86 so the proposed move adds 60 cents to the current tax, a 12.35% increase or about a 6% increase on the price on the cost of a packet.  Price elasticity measures the percentage change in demand given a change in a good’s price.  For cigarettes, price elasticities are between -0.25 and -0.5 so, such a  tax increase, would reduce consumption of cigarettes by 1.5-3.0%.  Quit elasticities – the effects of prices on numbers who quit smoking - are less than half of this because some people react to higher prices by cutting down on smoking not quitting. Thus of the 2.8 million Australians who currently smoke everyday at most about 42,000-84,000 will quit. 

This is a worthwhile response at least in terms of health outcomes particularly as it is likely to be concentrated among younger smokers who will substantially improve their lifetime health by quitting.  Health benefits for those who ‘cut back’ but do not quit are less clear-cut since there is evidence that those who cutback ‘compensate’ in their smoking behaviour by puffing harder to gain the levels of nicotine that their brains have adapted to. Smoking harder, of course, means a higher intake of the deadly carcinogens that accompany nicotine intake. This emphasises that there is no safe level of smoking.

Other benefits from the tax include revenues to government.  Indeed, ignoring entirely health benefits, there are ‘public finance’ reasons for taxing cigarettes heavily because they are in relatively price inelastic demands – demands don’t respond that much to price changes because consumers are addicted.  This means that, when a tax is levied, smokers do not change their behaviour that much.  Economists dislike such changes because they see them as distorting choices.  Thus, that taxes do not have an especially large effects on consumption means that the taxes are good revenue raisers.

Are there any downsides to taxes on cigarettes?  The issue of compensatory behaviour has been mentioned and this is a problem. People who do puff harder inhale more carcinogens and increase their health risks. Anecdotally, in the 1950s, the British who had high tobacco taxes seemed to have particularly high cancer rates. In addition, high taxes create incentives to use illegal sources of tobacco supply – in Australia these are called ‘chop chop’.  This is a problem because imperfectly dried home-made tobaccos cause severe respiratory disorders. To some extent such illegal supplies will be limited by proposals to end the commercial growing of tobacco in Australia.

There are issues of concern in terms of restricting individual freedom of choice – the claim of libertarians is that people should have the right to use dangerous substances such as tobacco provided they don’t impose external costs on others.  Moreover, this is the case given that revenues collected from cigarette excises substantially exceed the monetary cost of health treatment for smoking illnesses.  My counter to this claim is that most smokers begin smoking at early ages - the average in Australia is 15.9 years – when they have poor perceptions of the risks of smoking and when youthful impulsivity is high. For example it is known that adolescents greatly underestimate the difficulty of quitting smoking once a cigarette habit has been established.

Finally, it is claimed that those who are addicted to smoking and who are on low incomes are likely to be those who quit in response to taxes so that it is these disadvantaged who incur most costs. Those on high incomes just pay the higher prices.   This is true to some extent although the taxes paid by those on higher incomes can potentially be redistributed to those on lower incomes. Moreover, those on low incomes enjoy the benefit of suffering a lower incidence of cancers and emphysema.  There are many types of equality one might like to pursue but seeking to give people equal rights to contract fatal diseases is questionable.

All-in-all the entire proposal by Malcolm Turnbull seems to deserve bipartisan political support independent of arguments on the health insurance issue.  It has been several years since cigarette excises were increased and the evidence suggests that tax hikes help to eliminate the tobacco smoking pandemic.  These tax moves must be supplemented by bans, quit campaigns and negative advertising – and targeted measures to reduce high rates of smoking among indigenous Australians - but there is no question that tax increases effectively reduce smoking.

Professor Harry Clarke blogs at http://www.harryrclarke.com/