AC4005 Effect of Taxation on Smoking Tobacco Assignment Sample

• Subject Code : AC4005
• Subject Name : Law

Business Law

Ans. 1 There are several advantages of an increase in tobacco excise duty to the government that levies it. The UK government has passed a legislation that limits the advertisement of tobacco ever since the ’90s and this has had some enhancement. An increase in taxation of any form on tobacco products is passed on to the end consumer. Such an increase will motivate some smokers to quit, make others decrease their usage and foster in preventing new users from taking up this habit. There is evidence that the smokers show an inverse relationship to increases in excise duty on tobacco from 2004 to 2007 as estimated by international health organisations (WHO, n.d.). And, this makes taxation an effective method of decreasing the practice of smoking, especially among the lower income people. The lower smoking rates will eventually reduce the health cost due to the harmful effects of tobacco borne by the government over the years. This inculcates the direct healthcare costs and loss of productivity associated with tobacco use, providing smoking cessation services and other incurred expense such as fires and littering in public places (Armour, Brown, Laird, McAteer, Rennick, Riches and Whitehead, 2018).

Another benefit of using taxation to control the use of tobacco is that it increases substantial additional revenue of the government which can be spent on services that aim at providing public health and wellbeing improvement of the nation. World Health Organisation (2014) indicates that is taxes are increased by 50% per pack, governments worldwide would be earning the extra US $101 Billion in revenue that could be used in the improvement in health facilities and other social services. Therefore, it encourages the government to levy heavy duties as a significant step towards public health policy and betterment of the productivity of the country’s youth.

Such taxation also influences the allocation and distribution of economic sources in a variety of ways. The tax is collected by the government to not only to raise revenue but also to apply a variety of policy goals such as economic development and social injustice (Bird, 2015). These duties induce consumers to smoke less and empower them for a healthy lifestyle. A healthy nation, in turn, contributes to the well being and advancement of the economy. The taxes on tobacco positively impacts the health of working-age people which is one of the responsibilities of the government. Also, the negative impact of this product makes it easier for the government to apply higher taxes for their additional revenue. If the government is able to use this revenue in the betterment of the nation, public health and hospitals, it will be doubly beneficial for the country.

Ans 2. Excise duty can be defined as the taxes levied on the goods manufactured in the country. The government has followed a policy of increasing taxes on the tobacco products about 2% above the rate of price increase that year. The excise duties and taxes are one of the most effective tools for generating higher revenue. Many governments have used tobacco as a major product for taxation in order to improve the health and economic conditions of the country. Tobacco smoke is a legal pollutant but this does not excuse the polluter from paying the costs of the pollution. There exist some large industries in the UK that pays to decrease the legal pollution caused by its regular pollution. The government can use the same logic with the pollution from tobacco. The pollution and damage caused by it will not be eliminated easily by prohibition and awareness. Therefore, just like the profits of the energy companies intervene to reduce pollution by paying taxes, it is justified for the government to make similar excessive profits from the tobacco industry to reduce demand for such products and invest in the improvement of the environment of the country (Association of Directors of Public Health, 2015).

Smoking causes negative externality, therefore, causing the social cost of the usage of the product more than the private cost in the economy. If the social cost is more it creates an inefficient higher level of output of tobacco usage, therefore, the social efficiency can be increased by levying taxes and letting the smokers pay for the extra cost borne by the economy. Hence, it favours the argument that smoking is bad for the public and it is justifiable for the government to charge higher taxes to intervene in reducing demand (Pettinger, 2016).

There are many ways to induce consumers to reduce their tax consumption like advertising bans and public smoking prohibition. To reduce the health and economic consequences of tobacco, the government need to consider more than just the absolute level of tax by taking the changes in prices of other goods into account. If the nominal income of the public is increasing, then the tobacco sale might also increase even after levying taxes (WHO, n.d.). But still, the higher prices have led more people to quit and reduce the chances of a former smoker to start smoking again. Therefore, the taxes have proved to be the most effective method of making people quit smoking as per research by WHO (n.d.).

Ans3. The main determinants of price elasticity of demand for tobacco products are the price of the product, disposable income of the consumer, demographic features and socio economic status. The effect of the price changes on demand is measured by the price elasticity of the product. It is defined as the percentage change in the purchase of the product in reaction to any change in price. The increase in tobacco excise duty results in an increase in the price of the product which induces smokers to reduce smoking and lower the consumption of tobacco products among continuing consumers. The reduction of the use of tobacco products among young people along with the greater influence on the transition to regular use (WHO, n.d.). The demographic features include the gender and age of the population purchasing the product. Younger people are more sensitive to price changes as against older smokers due to the limited availability of money. However, the gender wise distinguish have not been measured in the sale of tobacco products.

Raising the price of tobacco products presents a huge potential for reducing the prevalence of tobacco. The income of the consumers is also a major determinant of influencing the demand for tobacco products. An increase in the disposable income of the consumer raises the chances of an increase in consumption even after taxes levied or price increase of such product. One another major factor that determines elasticity is substitutability of the product. The more substitute of the product the more price elastic its demand will be. But this aspect is not much affected in the case of cigarette because of its addictive factor. However, the cigarette industry is not much affected by the changes in prices as its demand remains intact in the market is a necessary good assumed by many consumers. Therefore, cigarettes are taken to be the least.

The poor smokers more price sensitive than the rich when it comes to price elasticity of tobacco products. This is because tobacco is not a necessary product and is a normal good therefore an increase in the price of tobacco products will eventually induce poor people to buy less of it. On the other hand, the rich people will have no effect on its purchase even after an increase in its price. This reflects the socioeconomic determinant of the price elasticity of the product. It is therefore argued that the increase in taxes on tobacco products will increase the burden more on the low-income people by decreasing their ability to purchase other goods and thereby increasing the inequality (IARC Handbook of Cancer Prevention, n.d.). The poor people are therefore here also worse off in the decision of higher taxes. As, if they keep on purchasing tobacco products even after the price increase, they will have lesser money left for other goods and services.

Ans 4. The price elasticity of demand on lower income consumers consuming 100000 packs if there is a tax increase of 1.5 euro bringing the price of a packet of cigarette up to 7.5 euro resulting in a fall of demand to 87000

The price elasticity of demand = % change in quantity demanded divided by % change in price.

Here, % change in quantity demanded = (87000 – 100000)/100000 = 0.13

% change in price = (7.5 – 6)/6 = 0.25

Thus, the price elasticity of demand = 0.13/0.25 = 0.52

This tells that the demand for tobacco products among the low income consumers is quite less elastic (less than 1).

Ans 5. The tobacco company needs to adopt some long term strategy to make up for the year on year increase in the excise duty by the UK government. The industry of tobacco marketing has played a crucial role in the worldwide spread of tobacco use and addiction. The market is successful until now with its manipulative and unique strategies of marketing. The UK industry of tobacco examines the target groups and do sophisticated brand management by building enduring relationships with their customers. Certain companies are attracting new customers by adding flavour to form a distinctive taste and reducing the content of tar and nicotine. These companies are able to appeal to the new customer base or making the old ones consume more having given less harmful content (Anderson, Hastings and MacFadyen, 2002).

For the long term success to adjust to the year on year increase in excise duty, the tobacco companies need to evolve their growth model through the development in the portfolio to meet the consumer’s changing preference. The industry must offer a new set of tobacco products with a lower harmful effect and add new flavours instead of this. Their strategy must be to focus on the evolvement of the new categories while the continuous delivery of old products in the business. This industry is transforming with the introduction of e-cigarettes which is appealing to the new generation smokers and more addictive than normal cigarettes. The tobacco industry can go to different sponsorship programmes like sports sponsorship which can be a major form of indirect marketing for the tobacco companies. Nowadays, women and girls are also started smoking so there exist a new growth market to target. The companies can make indirect advertisements and package appealing to the female section of the society (Tobacco tactics, 2020).

Even after investing in creating scepticism about the harmful effects caused by tobacco products, the industry has understood that they cannot win on the health prospect and will have to look for other aspects to prevail in the economy. The marketing strategies must ensure that the products are promoted vigorously in a way to appeal to the customers. They also can target policymakers to build a friendly business environment for tobacco products. They can influence the policy makers by highlighting their contribution to the economy by providing employment and tax revenue. Over the years, this industry has been a major tax contributor. One another strategy that the tobacco companies can adopt to solve their branding problem to the end consumer is to make another consumer product whose advertisement is not banned under the same brand name. This will help the tobacco company to build its name more quickly by advertising the other product and making the name familiar to all. Many alcohol companies like kingfisher have benefited from this strategy. This will open many opportunities for the company to make its product more known to the customers. All these strategies discussed gives an opportunity to the tobacco industry to keep and grow its customer base despite the year on year increase in excise duty by the UK government.

References for Effect of Taxation on Smoking Tobacco

Anderson, S., Hastings, G., and MacFadyen, L. 2002. Strategic Marketing in the UK tobacco industry.3(8), pp. 481-486. https://www.sciencedirect.com/science/article/abs/pii/S1470204502008173

Armour, G., Brown, L., Laird, McAteer, J., Rennick, L., Riches, E., and Whitehead, R. 2018. Strengths and limitations of tobacco taxation and pricing strategies. NHS Health Scotland. Available at: http://www.healthscotland.scot/media/1829/rapid-evidence-review-strengths-and-limitations-of-tobacco-taxation-and-pricing-strategies.pdf

Bird, R. M. 2015. Tobacco and alcohol excise taxes for improving public health and revenue outcomes. World Bank Group https://openknowledge.worldbank.org/bitstream/handle/10986/23464/Tobacco0and0al0ing0sin0and0virtue00.pdf?sequence=1

Association of Directors of Public Health. 2015. Tobacco levy: response to the consultation. https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/464795/PU1814_Tobacco_Levy_final_v3.pdf

Pettinger, T. 2016. Should taxes on cigarettes be increased? [Online]. Available at https://www.economicshelp.org/microessays/as/should-tax-cigarettes-increased/ [Accessed on 28 November 2016]

Tobacco Tactics 2020. Advertising Strategy. [Online]. Available at https://tobaccotactics.org/wiki/advertising-strategy/ [Accessed on 24 July 2020]

IARC Handbook of Cancer Prevention n.d. Tax, Price and Tobacco use among the poor. file:///C:/Users/91870/Downloads/handbook14-7.pdf

WHO 2014. Raising Tax on Tobacco. https://apps.who.int/iris/bitstream/handle/10665/112841/WHO_NMH_PND_14.2_eng.pdf;jsessionid=D1973474C6116E4483748CF081C81EB2?sequence=1

WHO n.d. The political economy of tobacco taxation. [Online]. Available at https://www.who.int/tobacco/publications/en_tfi_tob_tax_chapter4.pdf?ua=1

WHO n.d. Factors affecting consumer behaviour of purchasing tobacco products.

https://www.who.int/tobacco/economics/2_1ffactorsaffectingconsumerbehavior.pdf

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