Debunking tobacco tax myths

[Thomas3.20.2010]

  

ny debate on the tobacco and alcohol taxes is most welcome. A healthy and worthwhile debate, however, presupposes that the opposing sides uphold the truth, that one’s opinion or position is based on the facts. Alas, this is not the case.

  

  

Or perhaps some opinion writers might have just been misinformed. Neal Cruz’s recent column on sin tax reforms and smuggling (“Sin tax” reform bill will encourage smuggling, Philippine Daily Inquirer, 22 March 2012) is an example of a piece containing misconceptions and inaccuracies.

  

First, the claim that high prices will not discourage consumption disregards the fundamental law of demand, i.e. as prices increase, quantity demanded falls. The same is true for cigarettes and alcohol -- that a tax hike will significantly lower consumption has been proven time and again in various empirical studies.

  

Singapore has one of the highest cigarette prices in the world. The prices of cigarettes in Singapore increased by 300% from 1985-2005. According, to Theresa Yoong of Singapore’s Health Promotion Board, the impact of higher taxes was a plunge in the per capita consumption of cigarettes by 57% (from 2.15 kilograms in 1985 to 0.73 kilogram in 2005).

  

Second, although Neal Cruz’s claim that “smoking and drinking are addictions” is indisputable, asserting the ineffectiveness of price hikes is unfounded. Studies (again, numerous, e.g. Curbing the Epidemic, World Bank) have found that poor people are more price-sensitive -- which means that although these behaviors are addictive, a price increase will be a greater deterrent to them and can force them to completely abandon these activities (as opposed to “finding ways to get money to go on with the habit”). To reiterate a statement from the Woprld Health Organization, raising tobacco prices through taxes is the “most effective way to curb use” of cigarettes.

  

Third, even in countries (e.g., Thailand) with very high tax rates, sin tax revenues are significantly high. The main reason is that even as some smokers -- particularly the poor and the youth who have budget constraints -- stop smoking, those who cannot break the habit continue to buy the cigarettes even at a much higher rice. This is what price inelasticity means -- the decrease in the rate of consumption is less than the rate of the increase in prices (or taxes).

  

Further, although a price increase can serve as a temptation for illicit trade, the real determinants are the degree of corruption, government commitment and law enforcement. The Philippines is fortunate to have reformers leading the Bureau of Internal Revenue (BIR) and Bureau of Customs (BoC), who are serious in combatting tax evasion, like smuggling.

  

An indication of this is that the tax administration reforms that the BIR and the BoC have put in place under the Aquino administration are now reaping dividends, as both revenue collecting agencies have recently exceeded their revenue targets.

  

Those who oppose the tobacco tax reforms cite the experience in Canada, wherein the tobacco tax hike was wrongly attributed for the increase in smuggling. What actually triggered this was the tobacco industry’s “export” strategy to force taxes back down. After taxes were lowered, a dramatic rise in youth tobacco consumption ensued, leading to a tax rollback. Despite this increase in taxes, further smuggling was prevented due to effective government commitment. The lesson we can learn from the Canadian experience is this: smuggling can be mitigated not by decreasing sin taxes but through government’s efforts in implementing strong contraband-control measures.

  

Finally, the assertion of “tobacco farmer as a victim of sin taxes” has long been debunked. A study from University of the Philippines Los Baños professor Romeo Espino found that tobacco farmers can shift to farming other crops without much difficulty. Data from the Bureau of Agricultural Statistics corroborate this study, that indeed, many farmers through the years have shifted from tobacco to other crops. Furthermore, the sin tax bill will earmark 15% of incremental revenue for the exclusive use of programs to promote economically viable alternatives for tobacco farmers and workers.

  

Indeed, we must learn from the lesson of others. But learning occurs best when we learn from scientific studies and data-backed research, not unfounded claims and empty assertions.

  

Mr. Go, a summa cum laude graduate of the UP School of Economics, is a fellow of Action for Economic Reforms