Busting the myths around tobacco products and tax increase
With the Annual Budget of the Union Government approaching, a nationwide campaign has picked up driven by young people seeking a raise in taxes on tobacco products in India. The Young India Network of Nada recently held a Youth Parliament in Delhi demanding an increase in tobacco taxes and to pass the COTPA Amendment 2020 Bill at the earliest possible opportunity with stringent measures to control the tobacco menace in the country.
Evidently, the Economics of Tobacco Consumption is today a thought-provoking discussion among the academic and research community in the country too. Anjali Mathur talked to Dr. Anandajit Goswami, Professor, MRIIRS (Manav Rachna International Institute of Research and Studies) to underline some thought-provoking views on the subject as well as to clear some popular myths surrounding it.
Question: Welcome Dr. Goswami, you are one of the few people who has been researching and talking about the correlation of youth behaviour and the various influences which have a definite role to play in it. It would be interesting to know from you if the tax increase in tobacco products and its consumption has any correlation. What is your opinion on it, especially since there is a myth associated with damage to a country’s economy with strict tobacco control measures?
Answer: Taxes represent transfers of money from citizens to their governments. They do not represent economic activity, in the sense of actual consumption of valuable resources. As such, the issue confronting countries will be how to fulfil revenue needs by redistributing the tax burden in an equitable manner, once tobacco tax revenues decline. The crux of the issue will not be a question of inflicting damage on the country’s economy.
Coming to the Excise Duty on cigarettes. Reducing tobacco consumption by raising tobacco excise taxes will increase government revenues at the same time that it diminishes the disease burden associated with tobacco use. There is research evidence that proves that aggressive tobacco control campaigns can proceed full speed ahead without fear of damaging a country’s economy. Particularly if a country is a net importer of tobacco or cigarettes, the potential exists that modest short term economic gains will accompany the transition to a populace less hooked on tobacco. Reduced spending on imports will permit more domestic spending, with more employment thereby generated within the country.
Question: There are many opinions, especially the ones supported by the Tobacco Industry (TI) that tobacco is crucial to a nation’s economy. It maintains that without the cultivation of tobacco, manufacture of tobacco products, and distribution and sale of products, a country’s economy will suffer devastating economic consequences. Jobs will be lost, incomes will fall, tax revenues will plummet, and trade surpluses will veer dangerously in the direction of deficits. What’s your view on this?
Answer: I must deal with this question by telling you the findings of a case study. The economies of the six-state “tobacco bloc” in the south-eastern United States is perceived by many Americans to be heavily economically reliant on tobacco growing and manufacturing. However, the reality is, only 1.6% of jobs in these six states are associated with the core tobacco sectors of the economy. Almost half of the tobacco counties in the US derive less than 1% of their income from tobacco farming, and the vast majority of tobacco farmers work off their farms, most holding full-time jobs elsewhere.
The reality is that the TI can itself create a job loss through the mechanisation of cigarette production plants, in which technology supplants factory workers and by the purchase of imported tobaccos, replacing domestically grown tobaccos raised by local farmers. The wholesale price hikes reduce cigarette sales, thereby diminishing industry employment while raising profits for the cigarette companies.
Question: Do you have a similar argument around the myth of an expenditure induced economy diminishing by drop in sales of tobacco products?
Answer: This theory specifically refers to the jobs created in all sectors of the economy when tobacco workers spend their incomes on other goods and services. This income “recycles” as it is spent over and over again, the expenditure induced employment effect tends to dominate estimates of total employment associated with tobacco sales. Yet similar employment would be created by workers from any industry spending a similar amount of income. A significant economic presence necessarily implies significant economic dependence.
Implicit in the industry’s argument, occasionally explicit, is the notion that a decline in tobacco economic activity will entail a comparable decline in the economy of the country.
The reality is very different from this argument. If a person ceases to smoke, for example, the money that individual would have spent on cigarettes does not evaporate. Rather, the person spends it on something else. The new spending will
generate employment in other industries, just as the spending on cigarettes generated employment in the tobacco industry. Studies by non-industry economists in several countries have confirmed that reallocation of spending by consumers quitting smoking would not reduce employment or otherwise significantly damage the countries’ economies.
Question: Do you foresee any transition effects of these proposed tobacco control measures by the civil society and experts like you?
Answer: The World Health Organization predicts that the number of tobacco consumers will increase from 1.1 billion at present to 1.6 billion by the year 2025. Thus, for the foreseeable future, any realistic conception of successful international tobacco control must focus on reducing the rate of increase in tobacco use, rather than producing substantial absolute decreases in smoking. Globally, therefore, the “transitional costs” of successful tobacco control will involve less rapid expansion of the tobacco industry, rather than dire economic straits attributable to its contraction.
A particularly poignant image is that of poor tobacco farmers, their livelihood constantly in jeopardy because of the public health assault on tobacco. Certainly, any rapid decline in tobacco consumption could create transitional problems, for example, brief periods of unemployment for cigarette plant manufacturing workers before they found new jobs, some in the industries that expand because of the reallocation of consumers’ spending. However, the types of declines in tobacco consumption witnessed in the major industrialised nations are so gradual that they create few transitional problems of any consequence. As economist Thomas Schelling has observed, the principal effect of such diminution in tobacco use is not that tobacco farmers will be thrown out of work, but rather that the children of tobacco farmers will be less likely to go into tobacco farming than were their parents
Certainly, there are a few countries that are so dependent on tobacco that any substantial declines in their tobacco industries would represent genuine and important shocks to their economies, most notably Malawi (in which tobacco accounts for 60% of total export earnings) and Zimbabwe (23%). For selected countries, such as China, Brazil, and India, each with large indigenous tobacco industry and each including a large proportion of smokers, making the transition from a tobacco-dependent to a tobacco independent economy poses some special transitional challenges. The issues differ, too, between those countries in which tobacco products are manufactured and distributed by government monopolies and those in which the industry is privatized. Recognising, however, that even the most successful tobacco control campaigns tend to reduce consumption gradually. The real issue for all such countries is to reconcile the need to combat smoking for public health purposes with the need to ensure a smooth transition toward alternative economic enterprises.
Question: We are particularly interested to hear from you about the importance of tobacco control and the financial burden on a country due to the healthcare costs. Can you explain the benefits, costs of smokers and non-smokers. What are the private benefits and the social costs?
Answer: Tobacco imposes an enormous financial burden on a country, greatly increasing health care costs to treat smoking produced diseases and reducing productivity. In another prominent analysis, Hodgson concluded that smoking did add significantly to the net health care costs of the US. He even found that net smoking-related expenditures might be positive during the years of senior citizenship (65 and older). Hodgson’s seemingly contrarian finding resulted in part because he considered all of the smokers’ medical costs associated with consumption of cigarettes, not merely those associated with the principal smoking-related diseases (cardiovascular disease, lung cancer, and chronic obstructive pulmonary disease). Studies that have found no significant impact on net costs have limited consideration to these major smoking-related diseases.
We must also look at the true social or private costs of a citizen due to smoking. There are productivity losses attributable to smoking – absenteeism, sickened by smoking – are the costs and benefits incurred by the smokers and non-smokers private or social costs – smokers receive less in social security benefits (developed country context). In the UK, smokers’ greater disability leads to net pension payments to them. These are beyond the fiscal consequences incurred by the nation and the economy as a whole due to health hazards to its citizens.
Question: Last but not the least, the perennial question of whether a large tax increase is undesirable because it will reduce government revenues by decreasing legal cigarette sales. There is always apprehension raised about decreased smoking and increased smuggling of lower-priced cigarettes from neighbouring countries. Can you explain the elasticity of the fall in prices and the rise in revenue?
Answer: Politically conceivable tax increases generally generate increased tax revenues. Elasticity of reduction of revenue of cigarette sales due to rise in prices in comparison to the rise in tax revenue due to rise in prices. In developed countries, 10% increase in cigarette price leads to 4% decline in cigarette demand and for developing countries, it can be up to 8%. Empirical data suggests an expected rise of revenue from tax increases with a tax rise. In Sweden , the tax increase enhanced revenues by 9% and decreased smoking. There is no empirical evidence of revenue fall due to tax increases. There is also a myth that a tax increase would raise government revenues and decrease smoking but it is fundamentally unfair because its burden would fall disproportionately on the poor. The question here must be who is smoking more – Poor, Rich or the Middle Class. In poor countries – affluent people smoke more branded cigarettes and the poor smoke less priced cigarettes – tax to be tied to the price or the number of cigarettes. Different social classes respond to the tax rates and price changes. In the UK, the most affluent class never responded to tax rates.
(Views expressed in the interview are personal)
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