1. PRESENTATION 1 Why do governments tax tobacco products? Workshop on tobacco prices and tax World Health Organization (WHO) and International Union Against Tuberculosis and Lung Disease (The Union)

2. Questions at the end of the session Why do governments tax tobacco ? If people stop smoking in response to a tobacco tax increase, why do government revenues tend to increase? What types of taxes can be applied to tobacco products?

3. Two main reasons why government tax tobacco Generate revenues: to generate additional government revenues and meet annual revenue targets Promote public health: to promote health or achieve other social welfare goals

4. Sugar, rum, and tobacco are commodities which are no where necessaries of life, which are become objects of almost universal consumption, and which are therefore extremely proper subjects of taxation. Adam Smith, Wealth of Nations, 1776 Historically, tobacco has long been the target for government taxation

5. Tobacco tax has capacity to generate revenues efficiently for governments Large room for increase: In many countries, the tax rates applied to tobacco products are relatively low Relatively easy to administer: excise tax is usually applied to a few large cigarette manufacturers Inelastic demand: consumption falls less than the revenues generated from an increase in price

6. Promoting public health and social welfare An increase in the tax applied to cigarettes and other tobacco products generally results in higher prices at point of sale, assuming that the tax is passed onto consumers Therefore many governments are also using tobacco tax to increase tobacco prices and reduce consumption.

7. Promoting public health and social welfare, cont. Increasing tobacco prices has a stronger impact on people who are more sensitive to price changes -- including youth, infrequent smokers, and people with lower-incomes. Higher prices also deter people from starting to smoke and encourage people to stop smoking.

8. Revenues increase because the demand for tobacco is generally inelastic People do respond to changes in tobacco prices (particularly those that are price sensitive such as children and infrequent smokers). However, most people continue to smoke despite increases in tax, although their consumption may decline (they smoke less cigarettes). The remaining smokers pay a higher tax – therefore government revenues tend to increase from a tobacco tax.

9. Example: UK: increases in the prices of cigarettes have resulted in increases in tax revenue Tax revenue Price Townsend J.

10. 10 Example South Africa: increasing tobacco taxes results in increased revenues Source: Van Walbeek, 2003 Inflation Adjusted Cigarette Taxes and Cigarette Tax Revenues, South Africa, 1961-2003

11. However, it also resulted in lower cigarette consumption—thereby promoting health

12. This suggests that tobacco taxes are good instruments to achieve both revenue and public health goals.

13. What types of taxes can be applied to tobacco products? Excise tax Value-added tax (VAT) Sales tax Tariff

14. Excise tax Usually applied to intermediaries (i.e, tobacco producers), and is considered relatively easier to administer especially where there are a few large producers Applied to products with inelastic demand – that is, products that are not highly responsive to price changes (consumption falls less than the revenues generated from an increase in price): – Products that lack “merit,” and the government wishes to discourage (tobacco, alcohol, etc.) – Luxury goods (vs basic necessities), i.e., sports cars

15. Value added tax (VAT) and sales tax VAT is an indirect consumption tax applied to the “value added” at the stage of production, when product is sold or resold. Calculated as a proportion of price Sales tax: can be single or multi-stage – In example, some countries apply only a sales tax at the point of sale. – Multi-stage sales taxes are applied at more than one stage of the production and distribution of a product

16. Tariff Applied to the movement of goods across country borders. Usually applied to imported goods but can also be applied to exports. They can be used to discourage trade or protect domestic industries (i.e, import tax for cigarettes that result in higher prices compared with domestically produced brands).

17. Taxes usually form a large part of the price of a cigarette wholesale price retail price production costs industry profit wholesale margin retail margin excise tax VAT/sale tax total tax Example: In the EU, about 73% of the price of a cigarette is from the tax

18. An increase in the tax applied to cigarettes and other tobacco products generally results in higher prices at point of sale, assuming that the tax is passed onto consumers.

19. Review questions Why do governments tax tobacco ? If people stop smoking in response to a tobacco tax increase, why do government revenues tend to increase? What types of taxes can be applied to tobacco products?