Tax increase alone will not curb tobacco use

• Source: Global Times
• [20:28 June 22 2009]
• Comments

By Jia Wen

On Saturday, the State Administration of Taxation (SAT) announced its decision to significantly increase the consumption tax on tobacco products, aiming to increase fiscal revenue and protect people's health by curbing tobacco consumption.

Illustration: Liu Rui

To realize the latter aim, however, a purely economic approach is far from enough; it must be accompanied by non-economic measures as well.

Generally speaking, people's consumption of a certain product decreases with the increase of its price, so it follows that a tax rise would cause the price to go up, and in turn curb its demand. However, these effects vary greatly depending on the specific types of products.

For many products, price changes can profoundly affect people's demand. For example, if the average price of cars goes up from 100,000 yuan ($14,629) to 150,000 yuan ($21,944), a potential consumer might cancel their previous plan to buy a car.

When it comes to what we perceive to be daily necessities, however, this formula isn't always so reliable. One who normally consumes 1,000 grams per day of rice, for example, is unlikely to cut their daily consumption to 500 grams if the price of rice doubles.

The main difference between necessities and ordinary goods is the former's rigidity of demand, which makes one's demand less susceptible to a price change. Facing a price hike of 1 percent, the demand for ordinary goods might drop by two or three percent, while that for necessities might drop only by 0.1 or 0.2 percent, or even less.

The consumption of luxury cigarettes paid for with public funds is even more rigid. Though there is a sharper increase in their tax rate, what is burnt in smoking is taxpayers' money rather than the smokers' money, rendering them indifferent to any tax or price increase without strict scrutiny.

Moreover, some of the additional tax revenues from the rate increase will be turned into smoke and ashes, running counter to both aims of the rate adjustments.

Given these facts, smoking with private and public money should be dealt with differently.

Tobacco consumption with one's own money can be somewhat affected by a price increase, but not so much as the consumption of ordinary goods. Owing to addiction, cigarettes are like necessities for smokers, though the degree of necessity might be lower than that of the need for basic food.

The only way out lies in reducing the degree of necessity, which would reduce the rigidity of demand and strengthen the influence of a price rise on the level of demand. That level of demand, psychologically speaking, is dependent on the sense of satisfaction or concern smoking brings to the consumer.

Almost every smoker is more or less aware of smoking's harmfulness, so lighting a cigarette brings them positive and negative sensations alike.

The former is the satisfaction of their addiction. The latter may include many aspects, like a strong feeling that smoking is hazardous, that it disturbs others, and that it causes inconveniences such as having to find a place to smoke in restrictive locations. When the negative sensations outweigh the positive, the necessity of smoking will naturally decrease.

A feasible choice is to strengthen the publicity of negative aspects of smoking. Typical examples are Thailand, where terrible pictures of smoke-related illness are printed on each cigarette box, and Hong Kong, which allows smokers only limited places to smoke.

Such measures, however, are not enough to counter smoking with public money. In this case, one needn't pay a penny for the cigarettes, so the positive aspect of smoking is greatly amplified, even encouraging non-smokers to start.

The best medicine to cure the chronic disease of officials overspending taxpayer money on luxurious cigarettes is rule of law and accountability.

As they are spending taxpayers' money, the officials must assure the public their money is being spent in a reasonable way.

Laws and regulations regarding official consumption should be stringently enforced, and the officials themselves should welcome supervision of their spending from the news media and the public. Anyone who ignores the laws and regulations shouldn't be allowed to escape accountability.

The author is an associate professor at the School of Economics, Sichuan University. He can be reached via jiawen1128@yahoo. com