Are High Taxes on Cigarettes Fair?

High Taxes on Cigarettes are a Typical Example of Sin Tax

Taxes have often been used extensively for bringing down the prevalence of smoking. As an indirect measure that creates economic disincentives against smoking, the role of “sin taxes” are recognized in economic theory. Though many people argue for complete ban on smoking, experience as well as theory suggests that taxes are effective and practical, and do reduce smoking. However, they are far from a perfect solution.

Should Smoking be Taxed at a Higher Rate?

The primary purpose of tax is to collect revenue to finance the various objectives and policies of governance, in particular the provisioning of public goods that cannot be provided by market dynamics due to the free rider problem. One of the greatest disadvantages of tax is that they create disincentives for production and consumption, and thereby impose a burden on economy. However, this same character of taxes becomes a benefit when taxes are levied with the objective of creating such disincentives, as in the case of ‘sin tax’.

What is a ‘Sin Tax’ and How does it Work?

A tax that is used for curbing a particular behavior that is not endorsed by the society, or which is considered as being harmful for the society, is known as the ‘sin tax’. The word ‘sin’ refers to an act that is considered harmful and which the society would like people to refrain from. A sin tax attains this objective by causing a rise in the market price of such goods, and in turn reduces its production and consumption by the society. The extent to which the prices will rise and change the behavior related to consumption of the taxed product depends upon the elasticity of demand and supply of that product. 

Is Tax on Cigarettes a Sin Tax?

Most countries levy a higher rate of tax on cigarettes with the intent to discouraging smoking. This additional tax on cigarettes is an instance of ‘sin tax’.

Are Higher Taxes on Cigarettes Fair?

If smoking is a behavior that we wish to influence, then taxes can be an important tool for doing so. Unless smoking is something that can be considered with indifference, there can be little plausible reason for not having high taxes on cigarettes. 

Not even the greatest supporter of human freedom can possibly argue that cigarettes and smoking are a totally private affair. Smoking is often associated with cancers, but as any physician can tell you, it causes a lot more. In fact the most common disease caused by smoking is the ‘Chronic Obstructive Pulmonary Disease’ or COPD, which is also known as ‘smoker’s cough’ in common expression. It is a permanent cough, which often predisposes the patient to repeated and at times resistant infections, which then often spread to others in society. This amounts to a social cost of smoking, which has to be borne by the society in various forms and hence justifies higher taxation of cigarettes both as a means to curb smoking as well as to make smokers pay for the cost that they impose on the society.

What are the Social Costs of Smoking?

In addition to cancer and respiratory infections, smoking also causes heart disease, and strokes. All these diseases need to be treated, which leads to significant costs, part of which are subsidized by the Government and another part of which may have to be borne directly or indirectly by other members of society trying to help or support the patient. Even where the cost is shared through the medical insurance, it is ultimately borne by the society through risk pooling by rise in insurance premiums. 

The treatment and care of any disease requires real resources that are taken out from the economy, and their exclusion has an opportunity cost. The resources that go into treating the cancer patients could have been spent elsewhere creating social welfare in some form or the other had there been no cancer patient. The economy today is so intensely interwoven that every private cost and benefit is borne indirectly by the society. Thus, smoking creates a cost not only for the person who directly bears its consequences, but for the whole society. Indirectly, we are all affected. This provides a strong justification for making the smokers pay higher taxes to compensate others. 

Another reason given in economics for such high taxes is exactly in an opposite dimension of reasoning. The demand for smoking is usually so inelastic that it is economically considered a fit case for higher taxation. The idea is that tax on smoking can be imposed without any real impact on smoking habits themselves, which makes it easier for the governments to impose such tax and collect revenue. Such taxes are not resisted by public criticism since reducing smoking is an object of public welfare. Thus, it becomes politically convenient to impose higher taxes on cigarettes. 

Contradictions Exist, but Still Taxes are Justified 

Interestingly, the two justifications of higher tax on smoking are mutually contradictory. But then, either way, there is enough justification for high taxes on cigarettes. To sum up, it would be fair to conclude that both of them contribute to higher taxes on cigarettes, as a result of which Governments are able to collect more taxes in a politically convenient manner, while society is able to create disincentives against smoking.

Why not Ban Cigarette Smoking? 

Smoking is both a physical and psychological addiction, which means that a smoking addict may find it difficult to give up smoking all of a sudden. Thus, a complete ban on cigarettes may be difficult to implement and instead of stopping smoking, can end up giving rise to an underground illegal market of cigarettes. Such illegal activities usually attract criminals and mafias, who are willing to take the risk of breaking rules, and ready to indulge in violence against law abiding citizens who may oppose them. It also means rise in price of illegally marketed products which in turn allow such criminal elements to exploit addicted individuals. Thus, counter-intuitive to the ordinary perception, a complete ban can end up making things much worse for the society. Hence, as a policy measure, it is advisable only if and when the Government has the capacity to control and prevent its unintended consequences like illegal marketing, and also provide help to a large number of smoking addicts in quitting their addiction, with institutional expert assistance wherever necessary.