The Effects Of Tax on Tobacco and Alcohol

The Effects Of Tax on Tobacco and Alcohol

Based on the newspaper article I have chosen for The Star’s BizWeek Saturday 29 September 2012 ‘Tobacco and alcohol companies happy with status quo’, it discusses about the taxes on cigarettes and alcohol in Malaysia’s Budget 2013. Nakano says that, “excessive taxation impacting retail prices has always been a key factor in driving consumers to purchase illegal cigarettes”. Therefore in my opinion I am quite ‘balanced’ about the government not changing the tax on these items.

According to article, it begins by indicating that any increase creates a negative impact on sales and any upsurge in sin taxes drives consumers to resort to illegal products, followed by adding that JTI Malaysia would work with the Government to lessen illegal cigarettes in Malaysia as there “was a need to create greater awareness amongst retailers and smokers that selling and buying illegal cigarettes is a serious offence under Malaysian law.’. The concluding point states whereby the decision made by the government was consistent to the government’s Economic Transformation Programme (ETP) objectives, the National Key Economic Areas (NKEA’s) and the Entry Point Projects (EPP) which focuses on growing the tourism sector. JTI Malaysia believes that increased enforcement by the authorities, etc: the Royal Malaysian Customs and Ministry of Health have started to bare results .

Alcohol and tobacco are goods which are closely becoming a necessity in life. The illegal trade in cigarettes has a substantial impact on the people and economy of Malaysia. When the level of illegal cigarettes trade increased from 20% in 2002 to 36% in 2010, there was a corresponding decline of 31% in legal volume from 19.5 billion cigarettes in 2002 to13.5 billion cigarettes in 2010. This loss in legal volumes explains to a loss of tax revenues to the government estimated to be at least RM2 billion annually. Moreover, the illegal cigarette trade undermines public health initiatives to reduce tobacco consumption because it makes tobacco easily accessible at extremely low prices. Unlike legal cigarettes which are manufactured and sold in compliance with strict government regulated, illegal cigarettes deliberately neglect such regulations. Furthermore, the illegal cigarette trade encourages people to commit more crimes and possible funding of terrorism activities, as widely reported by the international media.

The government has made it clear that there won’t be any changes in the tax, when the taxes on tobacco and alcohol remain the same, the prices of these products to will also maintain the same too and therefore causing the demand to either remain the same or increase. Or it could go the other way, which is when the taxes are implemented, the prices of tobacco and alcohol rises and therefore causing the demand will to decrease, which leads to an increase in supply. On another viewpoint would be if, the government decreases the tax charge on tobacco and alcohol, the prices of the products may still remain the same original price, on the other hand the demand will surely increase.

A tax increases the costs of producing one’s product which causes the supply curve to shift to the left. With a tax, it is possible for the supplier to pass on some or all of this tax onto the buyers by placing a higher price. This is known as shifting the burden of the tax and the ability of businesses to do this depends on the price elasticity of demand and supply

The right diagram talk about demand is elastic meaning that demand responds to a change in price. The producer must absorb most of the tax itself meaning that they have to accept a lower profit margin on each unit sold of a product. When demand is elastic, the effect of a tax is to raise the price, but it causes a bigger fall in equilibrium quantity. The output has fallen from Q to Q1 because of a reduction in demand.

On the left diagram, the demand for the product is inelastic which enables the producer to pass on most of the tax to the consumer through a higher price without losing too much in sales.

Even placing a minimum price on cigarettes is not working due to the poor law enforcement in Malaysia plus cigarette retailers have been freely violating this particular law since it came into force. The government should at least increase the tobacco tax to enable the prices of cigarettes to increase to at least a double digit figure.

The RM7 per pack these past three years has not been prohibitive to children because it does not take reality into account. A national study on youths who smoke has discovered many facts on youth smokers. More than half of the minors (53%) said they purchase their own cigarettes, while 30% acquired them from friends. In Malaysia, 55% of the current adolescent smokers smoke less than 10 sticks per day. Mathematically, at RM7 a pack, a single stick costs 35cents. If three schoolmates were to share a pack of 20 sticks, they only pay RM2.30. States such as Kelantan, 95% of the retailers sold cigarettes to minors without verifying their age with a total of over 80,000 retail outlets selling cigarettes throughout the country, and many of which are located nearby schools. Last year, there was no tax increase on tobacco and cigarette prices remained affordable.

The World Bank recommends the tax on cigarettes to be at least 65% but in Malaysia, it is only 45% of the retail price of cigarettes. Malaysia should imitate countries that have successfully reduced smoking among youths. Countries such as Australia and Singapore have high tobacco tax to curb crimes involved in the country.

A pack of cigarettes costs A$15 (RM38) and S$12 (RM29.80) respectively. Both of these countries have also stringent border control to ensure smuggling of cigarettes is low.

While there are many government interventions to reduce the demand for tobacco are likely to succeed, the actions to reduce on cigarette supply are less promising. This is because that if one supplier is to be shut down permanently, an alternate supplier would reap the gains an incentive to penetrate the market. The drastic measure taken by the government of prohibiting tobacco consumption is unjustified on economic grounds, as well as unrealistic and hopeless. A substitution of crops is frequently suggested as a way to decrease the supply of tobacco, but there is little to no evidence that it reduces consumption, because the incentives to farmers to grow tobacco are much greater than for most other crops.

So is it good or bad if there is a change in taxes on tobacco and alcohol? If there is an increase in tax, it is more likely more crimes would occur which result in more youngsters who are unable to afford these products to be desperate and to result to violence and even theft just to satisfy their needs. People would also result to buying these products cheaper of the black market or by even through illegal smuggling. In terms of what the government should do, they should at least reduce the tax by controlling the imports of these products to our country and a better alternative would be to plant tobacco on our soil and to brew alcohol beverages in our land. These methods would probably reduce the amount of people from smoking and drinking by only a small margin, so the government should also carry out more health campaigns to curb on these issues on crimes and to be open concern of the public’s welfare especially children who are addicted to these products.

Reference

Article : http://thestar.com.my/news/story.asp?file=/2012/9/29/budget/12100718&sec=budget