Tobacco Taxing In Australia

Introduction

According to the Australian Bureau of Statistics, it is stated that “smoking is recognised as the largest single, preventable cause of death and disease in Australia” which highlights it is an issue that is recognised frequently in Australian society (Australian Bureau of Statistics, Gender Indicators, Australia , 2014). There have been proposals introduced to support a push in an overall decrease in smokers in Australia such presenting a form of tax on cigarettes, which has seen to be successful. “Tobacco taxing” as it is called, is still current in today’s society which continually sheds light on the fact that different policies that become implemented, affect a change in smoking behaviour in different ways.

Overview of Issues

associated with Smoking in Australia
Smoking raises many effects on the Australian economy and the citizens. The smoking of cigarettes proves to be negatively effective in relation to economic factors which predominantly include health costs and productivity. Due to the amount of smokers in Australia, the government has had to spend large sums of revenue into health costs. Figures show that the government spent a total sum of $147.4 billion dollars on health goods and services (Australian Government, Institute of Health and Welfare, 2013) and a sum of $3.8billion of that was spend on smoke related issues such as cancer (Cancer Council Australia, 2014). Although the amount of daily smokers aged 14 years and older are gradually decreasing which is shown in Table 1, the overall revenue for the government in 2013 was $553.551 billion which shows that the government is taking a hefty hit in relation to health effects and their total revenue (Australian Bureau of Statistics , 2013-14).
Daily Smoking Rate aged 14 Years and Older
Year Total %
1991 24.3
1993 25.0
1995 23.8
1998 21.8
2001 19.4
2004 17.5
2007 16.6
2010 15.1
2013 12.8

In addition to the tobacco tax, other campaigns have been introduced into Australia in order to reduce the smoking rates such as advertisement, restricted smoking zones, and educating the society about the risks of smoking. These anti-smoking theories have required large sums of revenue which has seen beneficial to the well-being of Australia as statistics show that smoking rates have decreased constantly over the past decade which is portrayed in Table 1 below.

Economic Models and Efficient Equilibrium
The taxing on cigarettes proves to have substantial effect on certain economic models. The increase of a price of a product for instance, changes a supply and demand curve in certain ways. As seen in Figure 1, a large increase in the price of a product sees the supply curve shift a considerable amount to the left along with a smaller shift to the left in regard to the demand curve. Consequently, the overall quantitiy of the product( in this instance average smokers) perceives to have a significant decrease along the quantity line, which is accurate in regard to statistical data.

In relation to the cigarette tax, the economic statement of whether a tax is imlpied to a good or service, there will be less of that product produced (R.

Glenn Hubbard, 2010, p. 144). It is evident in figure 4 that a tax on cigaretes, reduces both consumer surplus and producer surplus due to the fact that consumers are paying a higher price on the cigarettes and as the producers price falls, the producer surplus also suffers a loss. Some of the total consumer surplus and producer surplus will result in a sum of deadweight loss which is depicted in Figure 2 as the blue shaded area. Enforced deadweight loss has to be small in relation to the overall tax revenue that the government will receive as it continually increases, and if this were to happen, an efficient equilibrium would occur (R. Glenn Hubbard, 2010, p.

144).

Negative externalities have an effect on economic efficiency and can vary in different ways. Figure 3 shows the effects of smoking as a negative externality in production which results in the supply curve shifting to the left. As shown in Figure 3, a section of deadweight loss is evident as the yellow shaded area, means that if market equilibrium occurs at P2 and Q2, there would be an economically efficient level of output rather than at points Q1 and P1. This then further backs up the economic principles that due to increasing cost of funding smoke-related health problems, economic efficiency would be improved if fewer cigarettes were produced (R. Glenn Hubbard, 2010, pp. 337, 338).

Critical Analysis on the Effectiveness of a Cigarette Tax
The cigarette taxation has had different effects on specific groups throughout Australia such as gender, age, socio-economic status and most importantly income earners.

Statistics show that the increased affordability for cigarettes due to the taxation effects people of low income earning more than people that earn higher amount of income per year. Table 3 shows that the average amount of prevalent smokers becomes considerably higher as the amount of total income decrease thus affecting people of lower income more than higher.

Employment Categories Total prevalence of regular smoking (2010)

Upper White Collar (professionals, business owners, executives) 14 Males, 12 Females, 13 Persons

Total = 39

Lower White Collar (e.g. sales, managers) 20 Males, 19 Females, 20 Persons

Total = 59

Upper Blue Collar (includes skilled workers) 26 Males, 20 Females, 25 persons

Total = 71

Lower Blue Collars (semi-skilled workers, unskilled) 30 Males, 29 Females, 30 Persons

Total =

89

The taxation on cigarettes in Australia has seen to be beneficial in regards to price elasticity of demand. The demand for cigarettes is regarded as inelastic in comparison to other consumer products and research has shown that the increase price of cigarettes has led to a moderate fall in smokers in Australia (Tobacco in Australia , 2014). Figure 4 backs up this statement as it shows that the tax decreases the amount of smokers in Australia as there is a substantial drop from Q1 and Q2 shown below.

One method of taxation that could work hand in hand with the other implemented taxes that are current today is a method of taxation called Pigouvian tax. A Pigouvian tax is simply referred to as a tax that provides to be a counter effect in the problem of negative externalities (Flat World Education Inc. , 2014). Along with an increase in price for cigarettes tax which affect the primary effects (smoking rates, economic effects etc.), a Pigouvian tax would ensure that third party effects such as smoke related health problems and cleaning up the maintenance for littering smoking materials would be positively affected in addition thus covering all aspects in the problem targeted. As seen in Figure 7 below, the tax will create a upward shift in the demand curve which will consequently result in an increased amount of input into third party issues regarding smoking, thus resulting in an overall economically efficient equilibrium (R. Glenn Hubbard, 2010, p. 148 149).

Conclusion
It is clear that the implemented tax on cigarettes has seen to affect the Australian economy. The facts that have been discussed have ultimately shown that different policies and strategies in reducing smoking consumption can affect smoking behaviour in different ways. In addition to this, the change in economic models in relation to taxation on cigarettes has been discussed as well as an overall critical analysis on the effectiveness of the imposed strategy.