Handbook of Tobacco Taxation: Theory and Practice (Economic Theory of Taxation)

Abstract

Excise taxes are consumption taxes applied to a specific good, such as alcohol, gasoline, or tobacco, for example. Such taxes may be a mechanism to generate revenues for the overall government budget, be intended to curb consumption (e.g., “sin” taxes on alcohol and tobacco), act as an “earmarked tax” to fund a public good (e.g., gasoline taxes often fund road maintenance and repair), or correct for a negative externality of consumption (e.g., fat taxes on fatty foods) — or any combination of the four. Adam Smith laid the groundwork for taxing consumable goods, with an excise tax on such goods seen as the most market-neutral tax — guaranteeing government revenue without increasing the natural wage rate of laborers. The premise of this assertion is that if goods like tobacco, rum, or sugar become too expensive, then consumers can simply cut them out of their budget, as they are not necessities. Over the subsequent centuries, a number of economists have expanded upon Smith's theories. The additional research, along with years of practical experience, has cemented tobacco as one of the most frequent targets of tax increases, on both public health and public finance grounds. While the levying of excise taxes is theoretically substantiated for generating government tax revenues with minimum market distortions, as well as correcting for externalities, there are numerous theoretical and practical issues to consider when introducing or increasing excise taxes. Given recent discussions on international tobacco taxation, it remains of interest to find a way to objectively compare tax levels across countries. Broadly three approaches exist: comparing tax incidence, expressing taxes as a percentage of the retail consumer price; comparing monetary tax levels, in a common currency per pack of cigarettes; or comparing tax levels taking into account domestic income levels. Our study shows that this last approach, which takes into account the domestic affordability of tobacco products, is the most sensible for public policy benchmarking purposes. In general, governments levy excise taxes on tobacco to achieve fiscal and public health objectives. In order to evaluate both objectives, it is first necessary to review the elasticity of tobacco demand. From there, fiscal revenue and public health goals are discussed in context of the Laffer Curve (fiscal) and the Bhagwati Theorems (public health). Other theoretical concerns, such as affordability, regressivity, illicit trade, and the excise tax structure are also considered in this book. Of course, no analysis would be complete without an overview of the practical aspects of excise taxation — each of these topics are highlighted below.