Friday 26 October 2012

Government asked to reduce tax on Tobacco !





             A news break from The Sun (August 7, 2012) Tobacco Companies asked government to imposed lower tax on cigarette.

            "The Confederation of Malaysian Tobacco Manufacturers (CMTM) CEO Shahrul Azamin
Abdullah said excessive tax increases would cause significant price shocks to consumers, who would then turn to cheap illegal cigarettes as alternatives. " 

            The question is tax a good approach on tobacco? An indirect tax would normally be imposed on  the individual or company that causes those problems or externality. This is consistent with the so-called "polluter pays" principle. I personally think that tax should be imposed on tobacco as high as possible due to the negative effects  on cigarette. There are more than 4000 chemicals in tobacco smoke, of which at least 250 are known to be harmful and more than 50 are known to cause cancer. First of all, there are over six millions of smoking related death last year, and ten percent of which were in ASEAN countries, it takes more lives than HIV/AIDS, tuberculosis and malaria combined. With such shocking statistic, the government should drastically increase tobacco tax instead of heeding the Confederation of Malaysian Tobacco Manufacturers' (CMTM) suggestion. The price of a pack of cigarette is so cheap compare to Singapore which cost only RM 7-10 compare to RM 26. Percentage of people smoking in Singapore is just  14% while the smoking prevalence of adult males in Malaysia was 50.29% in 2009. This clearly shows that price does work a little on tobacco consumption.

            Demerit goods are goods which society feels are undesirable and is seen as any product that has negative externalities associated with it. They are overprovided by the market mechanism may be due to unperceived damage done to the person who is smoking. When government impose tax on demerit goods, price of cigarette increased caused the cigarette market fall in demand. However, the impact will be very low as cigarette is a addictive product. People will continue consuming even though the prices are high. More importantly, revenue gotten from tax on tobacco can also support government to fund anti-cigarette programs and hospitals to treat patient with smoking diseases. I think this is a great idea to stop communities from smoking and also provide them free treatment because if the tax rate is too low, people will continue buying cigarette and tax revenue is not much either, it is not beneficial for both parties. When the demand for cigarette starts to decrease, supply will fall eventually due to low on consumption of cigarette. However, the impact is very small because the elasticity of these goods are perfectly inelastic. No matter how high the price is, people will still buy it because it is addictive. Because it is additive, producers will take this opportunity to make consumers pay all the tax.

            On the other hand, I think government should  consider life-time jail term for those who are involved in illegal trading, transporting of cigarette, drugs and etc, including the producer/retailer. People of which are caught smoking or in procession of cigarette should be heavily fined or even jailed. This will reduce the chances people smoking in the public that cause air pollution and second-hand smoke that affect the non-smokers. Therefore, the government must stop any attempt to deceive the public the bad effects of tobacco consumption. Moreover, taxation on cigarette would also decrease the supply of tobacco because of the higher cost of production. When, cost of production is higher, selling price of cigarette will go higher and people will buy lesser and eventually sellers will produce lesser and buyers will buy lesser due to consumer behavior. However, it depends on tax incidence. Tax incidence is the analysis of the effect of a particular tax on the distribution of economic welfare.
            I think one way of regulating the sales of cigarettes is licensing retailers and blacklist or ban those who are selling illegal cigarettes. Sometimes, some illegal cigarettes are made of dirt and fake materials just because they want to lower their cost of production. This will cause additional health problems on smokers. Besides that, graphics warning on the cigarette pack will also reduce the consumption of cigarette proven in Canada where warnings covering 50% of the packet been highly effective in discouraging smoking. Moreover, graphics warning also persuade smokers to protect health of the non-smokers by not smoking near the non-smokers. Example, avoiding smoking near children and smoking outside the house instead of inside.

            In my opinion, imposing  tax on cigarette would be a great way to stop the consumption of cigarette/tobacco but there are difficulty when setting the level of excise tax. Tax level cannot be set too low or too high because market failure will occur. Secondly, government could not accurately value the private benefits and private costs or value of human health when imposing tax. Setting the tax at the correct level is virtually impossible without accurate information. Therefore in reality, government hope to be able to achieve the optimum level of output. Setting high tax rate will lead to fall in demand for cigarette although this may only be a small change due to demand for it is inelastic. Another problem of some taxes is that it will have a regressive effect on people who has low income. Also, setting high tax will encourage people to smuggle cheap and illegal cigarette to the country to avoid paying the tax. However, "higher excise tax on cigarette may be financially hurting low-income smokers rather than making them more likely to quit." The national average spent by low income smokers of which household income under $25,000 was 14%.

            On the other hand, if government set the tax level too low, people tend to smoke more because it is so cheap. For example, it used to be RM 10 per packet but now it is RM 7, people can buy almost two packet now instead of one. This will make the smoker smoke more because it costs them less as the percentage of their income.

            In conclusion, government should impose tax on tobacco and cigarette because these items are demerit goods and cause negative externalities to the country. However, it also depends on whether government set the tax high or low. Setting high tax would definitely reduce smoking and consumption of tobacco, this will force smokers quit and the expenditure they used to spent on these goods will be reduced, so I say this will be a better approach by the government.  
 

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